Back in the days of the GFC, the Chimerican beast was born. This illusory animal was the rise of a Chinese export giant feeding on the consumption giant of the US.
It was illusory because the capital flows of Chinese savings into US debt that made it work were also an enormous macroeconomic imbalance.
Sooner or later, the bubbles that Chimerica relied upon would burst, and so they did in the GFC.
But, the beast was not done. Chinese authorities were unwilling to do what it took to kill it. That would require them to liberalise their economy, shift wealth and income to households and raise consumption.
That is a shift of economic power from the state to the private sector, and the CCP fears what that means for its political control.
So, it went the other way and installed a dictator. He has since tried to muscle his way through the Chimerican macroeconomic imbalances with some success.
With the US consumer gone bust, the dictator kept Chinese growth high, inflation and unemployment low by redeploying some Chinese savings into an overextension of the original supply-side investment model.
He built export industries further by using vendor financing for every two-horse nation he could bribe with infrastructure. And he has repeatedly stimulated supply-side activity at home in debt-funded apartment towers, roads to nowhere and factories.
But, macroeconomic law is immutable. You can cheat it, but you can’t beat it. As the original Chimerican model discovered, debt can extend and pretend but can’t change the outcome.
Now, the Chinese half of the Chimerican monster is threatening to unwind.
The US and Europe are increasingly fed up with Chinese trade cheating. The US, in particular, is reindustrialising thanks to the CHIPS and Inflation Reduction Acts.
Europe will follow or be devoured, so it has no choice. Especially in the new energy industries it prides itself upon.
Some folks point to expanding Chinese exports to debunk this, and it retains some areas of competitive advantage for now.
But that is looking backwards. Global factories are now being built away from China, and supply chains will not return there.
The dictator’s cheating of macroeconomic law has also run out of rope at home. His debt-fueled supply-side stimulus across the continent was so vast and glutted that he has been forced to put the brakes on all of it.
The ghost cities and states are grinding to a halt. Urbanisation is running out of people. An aging population is decreasing the consumption pulse.
The dictator is left with an uber-modern infrastructure without the business case to finance it.
The GFC has come full circle. Now the Chinese half is bankrupt as macroeconomic imbalances implode at home.
The question is, what will he do about it?
America used monetary tools to deflate its debt bubble and allow market prices to clear.
China can’t do that. It would destroy the CNY, bankrupt its banks and crash global politics.
So, the dictator is taking the only peaceful course available. He is doing what Japan did before him when its mercantilist model reached the same development impasse in the late-1980s.
He is extending and pretending again. Burying old debt under new debt.
However, there is a problem.
Japan was already rich when it reached the impasse. Its economic structure was robust enough to absorb failing demographics, its capital markets were deep enough to absorb the endless debt extention, and it was a liberal democracy so geopolitics was irrelevant to its continued export of goods and capital while its currency fell.
China has none of these advantages, and it is beginning to show. Youth unemployment is climbing relentlessly as economic activity slows.
As the Chinese side of Chimerica dies, there are only two other ways out of this for the Communist Party of China.
The first it has already eschewed – liberalisation – but it could return via popular revolution.
The second is war, on its people or everyone else.
