World must ready for war as Chinese growth dies

There is an exceptional documentary running on Foxtel and/or AppelTV at the moment called Blood Money: Inside the Nazi Economy. It chronicles the rise of rise of Nazism from the macroeconomic angle, from the issuance of MEFO bonds and rearmament, through to the necessity of invasion and occupation as the economic output of the militarised economy.

To cut a long story short, it describes how the German economy had declared war on Europe long before it was official because there was no other alternative if its rising armaments industries (which were the new growth driver) were to keep the nation employed, and the Nazis in power.

One does want to overdo the comparisons with China today. The differences are as important as the similarities. But there are some unsettling parallels.

The first is that like Germany in the thirties, China is facing a rising unemployment problem as its economy goes ex-growth. Youth unemployment is particularly worrisome hitting 19.9%, the highest ever:

This is resulting from a combination of zero-COVID and zero-Property, both of which are ending the Chinese growth engine for the world. The slowing global economy is also hitting Chinese exports cyclically while Cold War 2.0 which will hit them structurally.

This is China’s long-discussed horrible demographic destiny coming to bear. Niall Ferguson:

The Chinese government has stopped denying it has a demographic problem. Last month Yang Wenzhuang, the head of population for China’s National Health Commission, admitted that his country’s population would start to shrink before 2025, according to a report in the state-run Global Times. “This is an inevitable result of a long period of low fertility rate,” Huang Wenzheng of the Center for China and Globalization was quoted as saying. “It can be predicted that China’s birth rate will continue to shrink for more than a century.”

But even this admission understates the problem, according to Yi Fuxian of the University of Wisconsin at Madison, who has argued for years that we should not trust China’s official birth statistics. His book “Big Country with an Empty Nest” — which was banned in China when it was published in 2007 — predicted that the Chinese population would begin to shrink in 2017, not in the early 2030s. In 2019, Yi argued on the basis of vaccination and other data that China’s population had already begun to decline in 2018 (one year later than his estimate). Now he has been vindicated.

The working age population is already falling and so household formation also faces a vast and intensifying headwind. This spells the end of Chinese catch-up growth, so much of which has been driven by property construction. There are 90m empty apartments and nobody can afford them to start a family!

Chinese growth is quickly resetting from 5% to 3% and below. In reality, it is probably even worse given distortions in the data. The options for the CCP to drive growth are limited.

• Doubtless, it will continue to drive productivity reform at home. That is, in part, why it is trying to end its capital misallocation in property. However, it is inherently limited on this front as it moves up the value chain and freedom (or lack thereof) becomes more critical to innovation.
• The often mooted shift to greater consumption is severely hampered by the property adjustment, aging population and failed policy. The CCP does not want too much wealth in the hands of the people. Money is power.
• Growing externally via trade will require a lower CNY. But this path, too, is close to exhaustion. Cold War 2.0 is already making the world risk averse to China and western economies are looking to secure supply chains in friendlier jurisdictions. A falling CNY will make this worse.
• That only leaves the public sector which is already heavily indebted.

This throws up a tricky political quandary for the CCP. If China can’t grow enough to keep unemployment in check then the social contract between Chinese citizens and the Communist Party of China – of endless growth and prosperity in exchange for CCP rule – will need to be replaced.

The obvious and indeed only candidate of sufficient magnitude is nationalism and, ipso facto, war. Most obviously with Taiwan. It is not coincidental that Chinese nationalism and a possible invasion of Taiwan are rising as the economy stalls.

China is already turning to armaments to help drive its economy:

The trend is unmistakable:

Like the Nazi economy, and the economy of the USSR for that matter, states that require their populations to exist in Spartan suspended animation need an outlet for both popular pent-up frustration and martial economic output.

The world needs to prepare for an unceasingly bellicose China that does not stop at Taiwan.