The Delusion of a Thriving Chinese Economy

The Delusion of a Thriving Chinese Economy

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 Signature

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.