Hey everybody. Peter Zeihan here comes to you from Colorado. A lot of you have been writing in and asking for scenarios of what the Chinese system will look like as it collapses. And Chinese history is rich with how it’s all going to hell. So putting my finger on one specific scenario I don’t think is very useful, but a lot of you have also written in asking about the Chinese housing market, and I think kind of exploring these two things hand in hand is worth a little bit of time.

So the Chinese follow a capital intensive investment model. There are there’s three types of economic growth. You’ve got consumption. Like you go out and you buy a home or you buy an iPod or whatever it happens to be. In the United States, that’s about 70% of total economic activity. Private consumption. Then you have exports. So, you know, you make something like Boeing and you sell it to the Indians.

Export led economic growth that is a system that is more popular in a place like, say, Korea or Germany. And then you have investment led economic growth, which is the building of stuff where regardless of where you get the capital, you get you build a road, you build a factory, something like that. And this has always been the method that has been favored in China and to a lesser degree, all of East Asia, because it’s something the government, for the most part, can control.

And it tends to be directed towards things that the government feels needs to be done. So roads, bridges, industrial plant and all of the East Asians have followed this pattern to a certain degree. The problem with this pattern and this type of growth is if you do it enough, you start to distort the economy and you absorb more and more capital and more and more labor and more and more resources.

And eventually you get to the point where there’s diminishing returns because you only need so many roads, you only need so many factories. In the case of Japan. They reached this point in the 1980s and they went from having stratospheric growth because this generates a lot of economic activity to just kind of a stall out. And they were left with a stack of loans worth about 50% of their GDP, $2 trillion at the time that was invested into assets that probably should have never been built in the first place.

And it took the Japanese system 30 years to churn through that, and that was 30 years of basically not having economic growth at all. Eventually, they realized the debt burden was so bad that they needed to focus what they could do on more productive stuff. And that turned out to be stuff that was not in Japan. And so we started this generation long outsourcing, the sourcing, whatever you want to call it, to countries that had better demographics and better debt profiles, most notably the United States.

And here we are now, 35 years after that process started. And the Japanese economy is more or less back in health. But it’s happened as the demographic situation has turned inside out. So consumption led growth in Japan will probably never happen again. They’re just too old. Something similar went down in Korea, but the Koreans attacked it with a fervor that the Japanese couldn’t muster, and they decided to deal with it by investing more, but going further and further up the value added chain.

And this could work in Korea because they were already among the most highly educated populations in the world, and they eventually generated things like the Samsung and the Daewoo and the Hyundai that we know today. It came at a cost. Extraordinary levels of turnover in the corporate world as entire chaebol, which are kind of giant industrial conglomerates, would go bust, which would generate a huge surge of unemployment and credit risk, which the government had to step in and assume the risk of itself in China.

It has done something similar to both of these as well as a third one. So first, building bridges to nowhere. The Chinese absolutely reached that level probably back in the early 20 tens. And most of the construction we’ve seen across China is of questionable economic use and the debt has been building up. Corporate debt has basically doubled since 2010 and it started at a level that was already in excess of American debt.

So, you know, we’re talking about a huge amount of money that has been put into things that probably are never going to have a return. They tried to follow the Korean model as well, but what they discovered is that their workforce was already fairly unproductive. And while overall productivity for the Chinese labor forces have gone up by 50 to 100% in the last 10 to 15 years, the debt load has gone up by a factor of five.

So from a cost benefit point of view, Chinese labor has actually decreased in terms of its overall productivity once you consider the cost, because in that time frame, the cost of Chinese labor has gone up by more than a factor of five or six. And then there’s a third model, unlike Japan, unlike Korea, which are, for the most part, private enterprise driven systems, the Chinese are absolutely state centric and in China and excuse me, in Korea, in Japan, the people always had options for where to put their own personal money to make their bets on their futures, prepare for their own retirements, expand their own wealth.

The Chinese don’t have that. Capital flight is strictly regulated, in many cases forbidden. And every time that the people find a new way to get money out, the Chinese government changes the law and so it all gets bottled up at home. Now, for the Chinese development model, this has proven successful at keeping the Chinese citizens money as part of the process that then funds all of that investment.

So whereas in Japan, it’s a mix of corporate and creates a mix of corporate and government. In China, the average citizen in many ways is being forced to help underwrite all this bad debt, and the Chinese citizens don’t really appreciate that, as you might expect. And so they’re always looking for outlets. Now, they can’t send their money abroad, so they looking for outlets at home.

And so China is famous for massive speculative bubbles that happen in commodities or gold or anything. And the one that has proven the most problematic and the one that has generated the most economic growth to this point has been housing. The government does allow you to own your own home. So people do that with gusto. And then they started buying apartments.

And second apartments and third apartments and fourth apartments. And basically we got an Enron style financial boom driven by growth in construction of the housing sector. Now, the new news that has come out in just the last few days that kind of crystallized this all for me was a dude in China by the name of he king, great name, who used to be an uppity up in the Chinese Statistics Bureau.

And his estimate now is that there are more there’s more housing units available that are unoccupied in China, so many available that they could house the entire Chinese population. So we’re talking an overbuild in excess of 100%. Do you kind of put that into perspective? The American subprime crisis at its peak had less than 5% overbuild because of subprime, probably closer to 3%.

And it was only because we bound up those mortgages with more healthy real estate investments and asset backed securities that it actually turned into the crisis. And we all know how that felt here. Ultimately, we had a financial crisis that lopped 5% off of GDP. If in China, you’re talking 100% overbuild in a country that is suffering from the advanced stages of terminal demographic decline and is already experiencing massive population losses against in the United States, where we had less than a 5% overbuilding, we still had population growth and inward migration.

The mind reels in coming up with a historical precedent here because there isn’t one in time. The Korean or the Japanese models were able to mostly recover from the overbuild, in part because private citizens were not wrapped up in the damage this time around in China. This specific aspect of the overbuild, which is the biggest in human history, isn’t even reflected in the debt data because a lot of Chinese have been able to pay for these apartments with cash and they now have invested for the most part, their total life savings in an asset that is probably worth at most a quarter of what they paid for it.

So in China excuse me, in Japan, in Korea, national coherence, public support for the very existence of the government was never damaged because people’s finances were only hit indirectly because of economic growth issues. But in China, you’re talking about a complete wipe out for what, for most Chinese citizens is their primary and maybe even only method of savings on top of a failure of the Korean style expansion to improve productivity on top of a failure of the Japanese style program to improve public infrastructure.

This is going to hit them from every possible angle when it breaks, and it’s going to do so by ripping the heart out of public support for the entire system and the CCP and the government in particular. So no, I am not particularly optimistic about how this is going to shake out. Quick addendum. I did a quick fact check before we went to print with this one print release, whatever on Mr. Hes data that he estimates that there are sufficient empty apartments to house the entirety of the Chinese population.

That was wrong. He says there’s sufficient spare housing to house twice the Chinese population. So everything I said before stands just underline most of it.

Hey everybody. Peter Zeihan here. Coming to you from home in Colorado. And if you haven’t been blind and immune, be marginally aware of international news. You know that the information out of China these past few weeks through July and August and into September has just been atrocious. Consumer spending is down. Lending is down, which should never happen in a country that is just capitalist driven.

The Chinese basically force feed capital into everything, and so lending should always be going up. And it’s not. We’ve had the foreign minister go missing and then be dismissed, the same as now happening for the defense minister or the head of the missile forces. Information that’s coming out about youth unemployment is atrocious, so they just stop collecting the data altogether.

Information on bond transactions is gone. And if you’re going to try to get into a more sustainable economic structure, you obviously need a bond market. They’re not collecting information on patterns anymore. So supposedly the moving up, the value added scale that the Chinese been talking about for years is now not even part of the plan. It feels like we’re looking at a broad scale societal and economic and political breakdown, and we are.

The shock, though, is that this is all happening at once. And after years, if not decades, of the story of rising China and hearing that from Beijing and oftentimes from political parties in the United States and around the world, for it to all of a sudden go completely inverted due seems like quite a shock. But here’s the thing.

It hasn’t all been happening at once. It’s just that this is when we’re noticing it. If you look back on the last few years, things have been odd in all things China. So first, let’s deal with this from the outside point of view and then from the inside point of view. So outside think of what’s gone on the last few years.

We’ve got the Ukraine war. We’ve got the Iranians on the warpath. We had four years of the Trump administration and we had two years of a more internally focused situation. And the Biden administration, the Europeans were dealing with the tail end of their financial crisis. The Japanese have been preoccupied with the demilitarization program. Everyone has been dealing with their own stuff, and it’s only kind of now that the noise out of China has gotten so loud that we’re even noticing that it’s not good news anymore.

As for the Chinese. Two big things. Number one, COVID killed the COVID. COVID cozied for three years. It was nothing but COVID in any sort of statistical release or news out of China was always viewed through the eyes of COVID and even if there was bad news, you could always lay that at the altar of growth. IT consumption was down a quarter.

That’s COVID problems with supply chains. That’s clearly with COVID problems with linked in their industrial production to news in the wider world. That was because we adjusted our consumption because of COVID. And so we’re only now kind of getting our first good look after years of COVID and then also within the Chinese system, that had a significant shift.

But when Chairman Xi, he started a series of purges under the guise of the like corruption campaign. And in his first five years, he removed every regional power center so he could never rise to national prominence. And then he went through and gutted the two factions of the previous presidents, Hu Jintao and Jiang Zemin, that put them in power to make sure that they could never come back.

And then he spent the last couple of years gutting the bureaucrats and the private sector of anyone who might be able to rise to national prominence. As part of that, he’s removed certain sorts of data collection to make sure that they can’t assist anyone from rising. So, for example, college dissertation, the information is not published anymore. It’s probably not even collected anymore.

So no one can take the economic route to prominence. And political biographies are no longer put together by the state. So any sort of local politician or younger politician has no way to rise in the situation that might down the road and generate a potential rival. So we’ve seen this ever tightening information vacuum across the Chinese space. All of these things have been going on for five and six years.

And during that five and six year period, we had an inflection point that was absolutely the high point of the Chinese system, and that’s largely demographic. We still don’t have what I would consider to be truly accurate information. But the most recent full data to be released by the Chinese in the last two three months tell us that the birth rate has dropped in China by nearly 70% since 2017.

That’s the fastest drop in the historical record of China, of humanity throughout all of recorded history. And in that timeframe, if the Shanghai Academy of Sciences is right, they’ve all recounted their population made over 100 million people, all of whom would have been working age people under age 40, meaning that in the last five or six years they’ve had that just peak workforce and the last year peak workforce probably in the earlier part of that process.

And they just don’t have enough millennials to do consumption at all. And we’ve seen the cost of the workforce increase by a factor of 14 or 15 in the last 22 years. So in the last five or six years in China, if you could somehow have a crystal ball and have access to all the data, especially the supplement collecting anymore, we would see that they’ve already fallen off the cliff and it’s only in the last few months that it’s become so obvious that it’s cut through the clutter and the noise and the preoccupations we all have with everything else in our lives.

And now it’s obvious that this system is breaking down. The demographic collapse is not correctable. There are not enough people under age 40 for them to even try, even if they had the macroeconomy, the structures that allowed or encouraged people to have families of the role. And we’re seeing an ever increasing rate of decline in terms of their industrial competitiveness.

On top of that, we have the issues with the Ukraine, where with China’s starting to come into the crosshairs of sanctions. We have China being more and more exposed to energy and food insecurity because the Europeans have taken everything else that is proximate to them. So they don’t have to use Russia and the infrastructure between Russia and China is so thin that stuff has to go out west past Europe through the Suez War around Africa and around India and around Vietnam before getting there, making it the most exposed supply lines in the world.

So we’re going to see more disruptions moving forward based on what’s going on in China with demographics and political situation. And we’re all certainly going to see disruptions in their ability to access the wider world for trade, merchandise exports. And that before you consider that the Biden administration is the most protectionist administration the United States has had, at least in a century, far more so than Donald Trump.

So the Chinese are getting hit from every single angle and Chairman Xi is so purged the system that it’s an open question whether he can even become aware in a reasonable amount of time that something needs to be done, much less have the capability to come up with a coherent policy to deal with whatever the issue is as it arises.

So demographically speaking, we know that this is China’s final decade as a coherent economic power, but now we see exposure and political failure that absolutely can bring that date forward. And that assumes that no one in Washington or London or Japan or the rest put their fingers on the scale and push this forward. This has been coming for a long time, but because of all the noise, we missed a lot of the signals in the last five years of just how quickly it was coming and now it’s here.

The biggest risk in all of this is whether or not we have enough time to adapt. If things like construction spending for industrial projects in the United States have risen to a level we didn’t even see in World War Two, the pace of the industrial expansion and the reshoring trend really is huge. Should have hopefully started five years earlier by better late a mother.

The biggest concern I have now is that the information vacuum out of China is so complete and the decision making capacity in China has so collapsed and the pace of decline is now so steep. And the fact that we’re coming so late to the understanding of all of these things means that we might not all realize the China really is broken until the product simply stops arriving.

There’s a lot of industrial demand for product in this country for things like transmission towers and transformers and other industrial equipment that is necessary to build out the industrial plant here that’s still made in China that we’re still depending upon. And some of these things already have waitlists that are more than 36 months. But we might now be in a situation where it’s not obvious that this stuff is never coming until the shipments simply don’t arrive.

And at that point, we will be in a bit of a pickle because we will not build out our industrial plant fast enough in order to get by without the Chinese in the mid-term. That’s our biggest risk. Now, luckily, from an industrial growth point of view and an employment point of view, this is a good problem. But it does mean that the Chinese collapse is likely to cause a lot of follow on damage here because of shortage.

And the only way around that is to build more and make sure that we don’t need those products in the first place. Unfortunately, we need a lot of those products in the first place in order to get built or no real body around that except for to start yesterday.

Hey everybody. Peter Zeihan here coming to you from Colorado. It’s Monday, the 4th of September. And the news out of China is that Chairman Xi Jinping will not be attending the upcoming G20 summit in India. There’s a lot going on in the world. I’m generally a big fan of the G20, but if you consider the Chinese economic slowdown, trade wars and all kinds of other things, it’s a good time for leaders to actually be meeting face to face, to do things.

Some people are saying that this is G spurning the G20 in favor of things like BRICS. But remember that he didn’t show up to the opening ceremony of the BRICS and the Business Forum, which is arguably the most important part of the BRICS forum as well. What we’re seeing here, instead of any political decision to favor or denigrate any particular forum or angle of policy, is instead the general ongoing and accelerating failure of the Chinese leadership system to cope with the situation they find themselves in over the course of the last 1213 years, Chairman G has basically progressively purged every part of the political system at his first five years.

He called it an anti-corruption push, and he went after all the regional power centers. And the next five years he went after the two factions that actually put him in power, that of his predecessors, Jiang Zemin and Hu Jintao. And the last couple of years, he’s going against anyone who has basically had an opinion or shown any competence who might be a theoretical successor.

And we’re now at a point where there’s no one left. So if something pops up that JI thinks needs to be dealt with, he is now the only one who can deal with it. So he sent his premier, Li Keqiang, who is got the personality and the competence of a block of wood to sit in for him, where he’ll basically just be reading policy papers and not acting to engaging in any sort of meaningful negotiation on anything while he does whatever it is he feels he needs to do.

And remember, he’s still a person, so this might not be policy related, it could be personal. But he is now found himself in a very similar situation to that of Donald Trump and Barack Obama, that he just doesn’t trust anyone to do anything. And so not a lot is going to get done that’s going to get done competently.

And even if he is the smartest person and the best manager on the planet, he can only be at one place at a time, doing one thing at a time. And as a result, Chinese policy in every other field at best stalls. Not a good sign. All right, that’s it.