The long-term outlook for China is bleak. I’ve discussed it plenty. However, the Chinese are getting a little lovin’ from an unexpected source.
At China’s National Congress, Xi got to hear all his biggest fans clap in unison and then listen to him spout off about his unrealistic 5% GDP growth target. And as a reminder to just how unrealistic this is, go ahead and look through China’s demographics, housing crisis, and overall economic stagnation.
Despite all those factors working against Xi, he’s getting some lovin’ from the place he least expected it. With Trump’s tariffs on Canada and Mexico, the mass exodus of manufacturing from China has slowed. This won’t save the Chinese, but the Trump administration just put a couple more quarters in their parking meter.
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Hey, everybody. Peter Zeihan here coming to you from Colorado? We’re gonna take a break from all the Trump stuff and talk about how China screwed, because that’s an oldie but a goodie that everyone likes to hear. So over the last couple of weeks, the Chinese have been having their national congress, which is basically a rubber stamp group of the Chinese Communist Party that gets together to slow clap.
Now, it was literally sort of hilarious when Sharon ji walked in like a thousand people slow clapped in unison. I mean, it was some creepy Orwellian shit. But it underlines just how tight the cult of personality is that, Ji is kind of a little bit like Trump, and now he requires these public displays of affection from people who aren’t allowed to speak.
Anyway, the big thing that was proclaimed was we’re going to stick with the 5% GDP growth target, which they can’t make, and they’re going to bend the will of the state, I believe, is the specific offic, quote, to robustly expand the consumption of the people, the idea that the state is going to get the people to spend, you know, has clear misunderstanding of how markets work.
It’s also not going to work. Most of the consumption that is done in the society is from people who are aged roughly 20 to 40 5 or 50. The people who are having kids, they’re building up. They’re accruing the assets that they’re going to have in life. And they’re going to college and they’re buying cars and they’re buying homes.
Once you hit that 45, 50 point, the kids are usually no longer a factor. The house is probably going to be downsized and they’re done accruing material or wealth. And so they then start building financial wealth, which is a different sort of economic activity. So for China to get people to expand consumption, he needs to make life easier for people who age 20 to 40 5 to 52.
Problems with that? Number one, China just went through the fastest urbanization process in human history, and it’s local governments in order to get more funding from the national government as well as more local tax revenue in the like, basically sold a bunch of land, built a lot of condos, which created housing that most people can’t afford. And each individual housing unit is typically owned not by one person, by it, by a cluster of neighbors and friends and associates, with each condo being owned by a different cluster.
So selling one is almost impossible. And, they don’t want to rent them out. Because once somebody moves into a condo, the feng shui changes. Never underestimate how superstitious the Chinese can be. And so they’re just sitting empty. So there’s a crisis of cost of living in China. That’s problem one. Problem two. Rapid urbanization means a rapid drop in birth rate.
We are now 50 years of that process. And the Chinese now have more people age 52 and over than 52 and under. There no longer is a big demographic of people under the age of 50 who can potentially consume. So the open question here, of course, is, has China had any real economic growth in the last five years because we flipped into this 50 to having more people over 50 than under during Covid, which is when the Chinese stopped collecting a lot of statistics on their population because you didn’t like the way that they looked.
So we don’t really know. But just working from what we do know, it does look like exports have expanded while consumption has contracted faster, generally leading to a stagnation across the system. When in terms of the headline figure, that would be problematic enough as it is, but we now have 20% terrorist from the United States on the Chinese system.
And with every incremental step up, the case for investment in China drops, which is not the same as saying that the case for moving out of China has improved because by threatening tariffs on Canada and Mexico, which is where most of the stuff would go, and then withdrawing and threatening and re withdrawing and re threatening. Donald Trump has basically introduced a huge amount of geopolitical and regulatory risk into the North American system, and no one who feels that they can afford to wait is going to move into that environment until that has some clarity one way or another.
We are now in the sixth or seventh week, the Trump administration, and we have already had five different tariff policies just on Canada and Mexico. So we are nowhere close to that settling. So ironically, this is providing the Chinese with something that they are in desperate need of. And that’s a bit of a breather, because before Trump came along, we were looking at record rates of slight of industry from China to other places, most notably North America.
Because the cost structure wasn’t there, the risk was there, and North America was risk free. Now, the risk in North America has risen to the level to counter out those other Chinese issues. So we’re kind of in a holding pattern waiting to see when Trump calms down.
