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China's desperate plea for a real economy | Stoic Markets

But the future is not nearly as bright as Xi hopes it is

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China’s economy has been on the rocks ever for the last 4 years.

Their Covid lockdowns were the strongest and longest lasting in the word, and their manufacturing took a major hit as the entire country was shut down.

Their property bubble rivalled that of Japan’s, and came falling down in spectacular fashion, and is still causing havoc.

And to top it all off, China’s tech scene has been crippled by geo-political strife, right as the country needs its services industry to thrive if China is to escape the middle-income country trap.

Xi Jinping has now embarked on a new mission to transform China into a real productive economy, by “accelerating development of new quality productive forces”…

Whatever that means right?

It turns out those are essentially communist buzzwords used by Marxists in the 19th century to supposedly build strong economies.

What its really about is building an economy up based on manufacturing, instead of real estate, technology or even services.

While many believe that China’s economy is already based around manufacturing, that hasn’t actually been the case for over 2 decades.

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Two separate forces have been the driving force behind China’s growth… Concrete, and stolen technology.

More than 60% of China’s growth over the last 2 decades has actually come from Chinese technology clones of American innovators, or construction projects like high-speed rail, ghost cities or highways into the desert that serve no real utility.

This has culminated in 4 years of Chinese economic stagnation as these tech firms are incapable of competing across the rest of the world when access to the market isn’t throttled by the Communist Party, and these concrete vanity projects have served no real use to actually generate wealth.

I’m often reminded of an old apocryphal saying from an economist:
“In order to add $1 Billion to GDP, all you need to do is build a $1 Billion bridge to nowhere.”

The CCP seems to have recognised this stark reality holding their economy back, and as a result they are returning to a focus on manufacturing.

there are two major problems with this shift however, that mean China is unlikely to see its economy improve.

For China to expand it’s share of global manufacturing, other countries will have to allow it, and every developing nation in the world can now offer cheaper labor prices that China, and with less geo-political ricks.

For a western company to offshore production to Thailand, there are considerable benefits. Cheaper labour than in China, and more importantly better relations with the countries that would be importing those goods.

The numerous problems with China surrounding Taiwan make this a simple reality, that can not be avoided for any business looking to offshore manufacturing.

China is also at serious risk of falling into the “middle income country trap” whereby a developing nation is able to drive growth and wealth by providing cheap labour and manufacturing, but that growth and wealth leads to increased costs, which then reduces their competitiveness in a global market.

Countries like the United Kingdom, the US and Japan managed to avoid this problem, as even though their initial growth was heavily based on manufacturing, they were able to transition to service based economies when their costs of production increased by too much.

China’s about-face regarding services means they are incredibly likely to reach an upper limit to the wealth they’re able to drive, as their costs of labour will forever harm their competitiveness with countries willing and able to undercut them.

Stay stoic,

Max

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