Will China Be the First Domino in a Global Collapse?
The increasingly desperate, secretive Chinese Communist Party may be powerless to stop the combination of downward trends which, upon passing an event horizon, could trigger a global collapse as the world’s second-largest national economy continues to edge closer to the brink.
Bad signs are flashing everywhere around the world: The Fed needs to lower rates to prevent a meltdown, but can’t get inflation under control. The Bank of Japan keeps intervening to prevent the yen from crashing to zero after ending decades of ZIRP. The European Central Bank is warning that the “soft landing” may never come. And in China, there are compounding signs of trouble as well.
A recent Bloomberg report found that Chinese GDP growth slowed far more than economists expected, and while the ruling party has made moves to boost domestic industrial production and exports, domestic demand remains extremely low among consumers. In the already-troubled real estate sector post-Evergrande, potential homebuyers just aren’t buying the way they used to, fueling further price drops not seen in almost a decade.
It’s almost as if the post-COVID GDP boom was not only temporary but bound to reverse.
China GDP, 2018-2023
The Chinese government and central bank can be assumed to take every step they can to manipulate the economy back to some state of relative health, restore confidence, and stave off an implosion. To that end, the Chinese Communist Party’s Central Committee will complete its Third Plenum this week — a closed-door meeting where economic policy is discussed and decided in secret.
But surprising to some is China’s rigid insistence on focusing on investment by cobbling together more buildings, such as factories, in pursuit of what Chairman Xi calls “high-quality growth.” Meanwhile, to increase faltering revenue, localities are increasing tax audits and raising fees on services, further dampening the already dreadfully low willingness of consumers to spend money on things like retail goods and domestic tourism.
Meanwhile, a deepening housing glut is resulting in more pre-sold homes being left unfinished by cash-strapped developers and construction firms, putting more loans into default, and leading foreign buyers to flee for greener pastures.
China Newly Built House Prices (YoY Change, July 2023 – June 2024)
This week’s Third Plenum meeting will focus on what measures may be needed to reverse the downward spiral and reassure both Chinese citizens and foreign investors that the State has all the tools to prevent those dark clouds hanging above the country’s economy from turning into a devastating storm.
From selling bonds to loosening restrictions for real estate buyers, nothing short of a historically unprecedented intervention will be enough to save China’s economy. And even then, the result will not be a solution, but a postponement of what’s to come. State media reports have emerged accusing institutional bond buyers of shorting the economy by betting on lower interest rates — essentially saying they expect that China will need to lower the cost of borrowing in order to juice the economy by artificially bolstering lending.
With the medium-term lending facility rate unchanged for now, it’s clear that China recognizes the danger of further weakening the yuan — but with a deepening glut and no end in sight, the pressure is on.
The problems are global. Whether it ends up being China, the US, Japan, France, or somewhere else that triggers the freefall is yet to be seen. In the US, the economic data is manipulated to paint a rosier picture, and one can expect the same (but worse) from China — to the extent that the government reveals real numbers at all.
So no matter which country you’re from, and which is the first to trigger the global meltdown, you’d better have hard assets like gold and silver to protect your wealth from evaporation when the day finally arrives.
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