The conclusion that China’s economy is probably shrinking is confirmed by manufacturing surveys and prices indexes, but the most telling indicators are the mountains of unneeded commodities. Copper in recent months has been stockpiled in parking lots, and iron ore has been stored in granaries. Ships loaded with unwanted coal have been waiting off Chinese ports. That’s why China analysts are talking about the “heart attack” economy, and Anne Stevenson-Yang of J Capital Research uses the phrase “rigor mortis.”
After 35 years of virtually uninterrupted growth, China has hit an inflection point. The three primary reasons that created more than three decades of growth either no longer exist or are disappearing fast. The country is no longer reforming, the international environment is not benign, and the “demographic dividend”—an extraordinary bulge in the workforce—is turning into a demographic bust.
Now, with declining markets abroad, China cannot earn big profits from sales to foreign customers. Without the export cushion, the transition to a consumption-led economy in China will cause dislocations that are considered politically unacceptable.
The Chinese economy is now in a new supercycle. This time, the direction of the cycle, which could last decades, is down. Yes, China has passed its peak and is unable to implement necessary reforms.
The downward spiral in China is not necessarily a bad thing for the US:
Smaller American manufacturers, for instance, will undoubtedly be helped as they will face less competition from their Chinese counterparts. The return of manufacturing to America will accelerate.
So we don’t have to be overly concerned about China’s coming failure. The truth is that America depends on China much less than China depends on the United States. Take China’s trade surplus in goods. Last year, China’s surplus against the U.S. amounted to $295.4 billion. China’s overall goods surplus was $155.1 billion. That means its surplus against us was an unimaginable 190.5% of its overall trade surplus. China, in short, has an economy geared to selling things to the United States.
And, incredibly, China’s dependence on the United States is increasing at this moment. In the first seven months of this year, Chinese exports to Europe fell 3.6% over the same period last year. How about China’s exports to America? They jumped 11.4%.
The United States, on the other hand, does not have an economy geared to China. Trade for the United States—and especially its trade with China—is a negative for its gross domestic product. This is not to say that trade does not, in the larger picture, benefit America. It certainly does. But it is to say American economic success does not depend on China’s.
And, contrary to a general belief, the U.S. would be better off without Beijing funding its federal deficits. Our problem has been too many international and domestic investors wanting to lend to Washington, not too few.
So when China’s economy collapses, Americans will realize they have less stake in the Chinese miracle than they have been led to believe.
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What the negative development in China means for Europe is difficult to tell. However, for many German manufacturers, which during the last few years have profited from exports to China, it must be very worrying.