DANIEL VAUGHAN: A Second Chinese Contagion Looms

August 23, 2023

The first Chinese contagion was the COVID-19 pandemic that shut down the world, killed millions, and rocked the global economy. American ingenuity saved the planet with Operation Warp Speed. Now, we face the second Chinese contagion, which is economic. China's economy is buckling under decades of poor communist central planning. To sum it up: while the US and the world deal with inflation, the Chinese economy is crumbling under deflation.

That's not me pontificating. The Wall Street Journal has been all over China, saying that "Investors Fear a Financial Contagion in China." After the property sector stumbled 18 months ago, China's property developers are finally rolling over and declaring bankruptcy. WSJ columns are asking earnestly whether China is facing its "Lehman moment," referencing the disaster that kicked off the 2008 financial crisis.

The "China Century" is on Pause.

Bloomberg is in the same boat, saying the country is facing its Lehman moment. And there's growing concern that China's economic downturn will roil US commodities like oil, grains, metals, and more. The result is likely China devaluing its currency and increasing its stimulus programs to kickstart its floundering economy.

Less than a decade ago, it was easy to find prognosticators predicting a "China century." They claimed the remainder of the 21st century would be owned by the Chinese as America faded into second place. The front page of the Monday Wall Street Journal read: "China's 40-Year Boom Is Over. What Comes Next?"

The answer? No one knows because this Chinese Communist Party version of the modern Chinese economy has never faced a downturn like this. All the optimistic prognosticators of Chinese dominance presumed China would continue upward without challenge. But it has been challenged by its own demographic ills, poor central planning, and more. The fruit of Marxist communism remains the same: the death of every economy it touches.

China Not Fulfilling Its most Basic Duties.

We could also witness the failure of communism tearing at the very fabric of the Chinese order. The WSJ reported, "Beijing has failed to convince households that their financial future is secure in the post-Covid era." It's failed to convince anyone because the rigged economic data China does publish shows a rapidly deteriorating economy:

The country's main July data, released Tuesday, paint a picture of an economy close to stalling out. Growth in retail sales slowed to 2.5% from a year earlier—with headline consumer inflation already negative. Industry barely grew at all: 0.1% from the prior month in seasonally adjusted terms. And banks extended the smallest amount of new loans, on net, since 2009. Beijing has responded by cutting two key policy rates—and announcing it will no longer publish youth unemployment data, which was running in the neighborhood of 20%.

You can't hide an economic recession — the word no one uses to describe China. Chinese youth unemployment was last reported as over 20%, but likely higher. The property sector is dead, and Chinese banks are struggling to lend money to anyone or anything. The government can report whatever it wants. The people there know the economy is terrible because the credit crunch is real.

It's possible that China recovers from all of this and bounces back to the economic lead. But it's also possible we've witnessed the end of "peak China" and be forced to pivot to a weakening, shrinking defensive China. And some of Beijing's military moves suggest they understand their time on the world's stage is shrinking, not growing.

China Sneezes. What happens to the World?

The economic contagion is a political one too. If China fails to convince the people its moves work, trouble looms: "If Beijing fails to prove to households that it is still capable of forceful, practical action in their interest, China may be in for a painful period of economic stagnation—and eventually, perhaps political instability too."

That leaves the United States and the rest of the world in the unenviable position of dealing with a potential economic contagion from China. Like the COVID-19 pandemic, China assures everyone that they have everything under control. But it's worth remembering: these are the same central planners that failed the pandemic and steered their country into the current economic quagmire. Take their promises with a few grains of salt.

The US economy is strong and has made it through far worse. But it's still true the second-largest economy in the world is dealing with something more than a sneeze or a cold. The Chinese Communist Party has to navigate a floundering economy, disastrous demographics, and the handcuffs of communism in an attempt to counter the United States. That could make them more erratic and belligerent the more they realize they're falling behind. There's a real threat China could face multiple lost decades, just like Japan.

There are no masks or fifteen days to control the spread plans for China's economic contagion. We have to be vigilant and continue decoupling the United States from China.

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Thomas Jefferson
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