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Musings Report 2019-1 1-5-19 China's Increasing Fragility
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
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China's Increasing Fragility
China's enormous successes--raising hundreds of millions out of poverty, landing a rover on the dark side of the moon, etc.--are well known. Less appreciated is China's increasing vulnerability to financial downturns.
As this article explains, The China Story That Is Far Bigger Than Apple, China's trade balance--trade surpluses for decades--is close to slipping into trade deficits. (the same ideas can be found here on Zero Hedge.)
At the same time, China's once-mighty pool of savings has diminished as consumption has risen. As a result, China now needs foreign investment more than it did in the previous era.
As noted in a recent Musings, Chinese businesses have borrowed around $2 trillion in US dollar-denominated debt, requiring the acquisition of dollars to service the debt.
So far this sounds like a typical case of a fast-growth economy maturing into a trade-deficit, debt-dependent consumption economy.
What the article misses is the staggering rise in the cost of living in China over the past two decades. Some services are still dirt-cheap--subway fares are very modest --and private healthcare is a mere fraction of healthcare costs in the U.S.
But other costs--housing, food, clothing, etc.--have shot up to the point that our on-the-ground correspondents report that living expenses aren't much different than in the U.S.
Officially, inflation is low in China, but the reality is not so cheery. "Domestic sentiment is definitely very bad, perhaps even worse than during the 2008 global financial crisis," said analyst Fred Hu.
Recall that wages for college graduates are around $1,100 per month (7600 RMB) in China, with $1,500 per month (10,000 RMB) being an above-average salary.
While white-collar wages are $13,000 annually, apartments in first and even second tier cities are similar in cost to desirable U.S. cities. Rent for a small flat is $800 USD in Shanghai, more than half the average salary, and flats typically cost hundreds of thousands of dollars to buy.
As I've noted before, roughly 3/4 of all household wealth in China is tied up in real estate, where it is effectively illiquid dead-money, earning no yield.
Reflecting a broad malaise, China's stock market has dropped by 25% in 2018 while its currency weakened against the USD (by official design, of course).
One question I haven't seen being asked that seems glaringly obvious: if everything is going great in China's economy, why did President Xi feel compelled to declare himself president for life? Why is China rushing to install an Orwellian system of social monitoring of behavior, online activity, etc., with heavy penalties for those who violate official norms?
We might also ask why critics of official policy are censored or even swept out of view. Are these the actions of a secure, confident ruling elite? The short answer is no, and some of that insecurity is undoubtedly financial/economic in nature.
Transitioning to Xi's vision of a high-tech, high-value consumer economy requires navigating an era of increasing fragility, an era in which the past offers few if any guideposts.
Highlights of the Blog This Past Week
What Do the CIA, Soros Foundation and the Kremlin Have in Common? 1/5/19
Commoditization = Deflation 1/4/19
The Crisis of 2025 1/2/19
A Couple of Thoughts on 2019 1/1/19
Best Thing That Happened To Me This Week
The tangible demonstration (i.e. contributions) that Of Two Minds delivers meaningful value to you.
Musings on the Economy: Risk-On, Risk-Off
While economists refer to charts and formulas to quantify economic activity, people make decisions based on emotions, what Keynes called "animal spirits."
When people feel positive about their prospects and confident that their investments will pay off, they're more likely to borrow, spend or invest money, even if interest rates are rising.
When people feel less secure, they decide to skip the new loan, purchase and investment.
Even though the statistics of job and GDP growth are positive, there's a sense of skittishness in the air as risk-on animal spirits fade and are replaced by an intuitive caution.
From Left Field
A More Colorful, Diluted and Dying Japan
France: Understanding the Gilets Jaunes Uprising
The Yoda of Silicon Valley: Donald Knuth, master of algorithms, reflects on 50 years of his opus-in-progress, 'The Art of Computer Programming.'
Its Competition All the Way Down: On the Spontaneous Anthropology of Contemporary Capitalism
The American Economy Is Rigged And what we can do about it: A vicious spiral has formed: economic inequality translates into political inequality, which leads to rules that favor the wealthy, which in turn reinforces economic inequality.
41 Reasons why wind power can not replace fossil fuels
Does China Have What It Takes to Be a Superpower?
Against Charity
The Cost of Living in Mark Zuckerberg’s Internet Empire: A year of staggering revelations is a reminder of how much Facebook has corrupted life online.
Prime and Punishment -- amazon....
The Miracle of Minneapolis: No other place mixes affordability, opportunity, and wealth so well. What’s its secret? (2015)
How Much of the Internet Is Fake? Turns Out, a Lot of It, Actually.
"Wherever smart people work, doors are unlocked." Steve Wozniak
Thanks for reading--
charles
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