China Meltdown: I Hate to Say I Told You So

I am not some self-prescribed market pundit who makes predictions on stocks and currencies.  However, I have said numerous times in this space that we should be wary of China’s growth rate, and its impact on global economics.

China’s economic muscle, potential as the world’s largest consumer market and threat as an enemy of the U.S. is indisputable.  But haven’t we heard all of this before? Over the course of history, the media has hyped the Japanese, Koreans and the Saudis as potential economic superpowers, only to see their economies tamed by the realities of global economics.

What I have maintained is that China had significant fundamental problems, and that a 10% growth rate was unsustainable. At its core, quasi-capitalism, does not work. Government controlled capitalism (unsupported by the rule of law) failed miserably in Russia. Socialist economies around the world have much lower productivity rates than the United States.

As in Russia, China’s failure to protect intellectual property rights dis-incents innovation, and devalues brands and products. But pulling back the kimono further exposes even deeper issues in China. The country’s widening dependency gap (the proportion of workers to those receiving government retirement and health care benefits) and escalating wage inflation are inherent constraints within China’s economy.

In any region where labor costs are below market, high demand drives up labor rates, eliminating competitive advantage. Wage inequality is far worse in China than it is in the U.S.  Government stimulus is driving up debt. To boot, traffic and pollution are stifling in China, magnifying the contrast between its large cities and rural regions populated by unskilled workers.

All of this points out an obvious theme; we have offshored low value activity to China, and just because they have a lot of it, that does not point to the demise of the U.S. economy. The media loves fear mongering.  Losses of U.S. jobs are overstated. Over the last 25 years, U.S. manufacturing exports quadrupled (to $1.4 trillion in 2014).[i]  Manufacturing jobs have slipped from 17% of U.S. employment in the 70’s down to 12% today.

The conclusions are misleading when you consider that the total contribution for manufacturing to global GNP has slipped from 27% to 16% during that time (reflecting the shift to the digital economy)[ii].

I once worked for a wise man who told me to “never believe any number you don’t make up yourself”. I would also say, don’t believe everything you read.

[i] Top 20 Facts about Manufacturing-National Association of Manufacturers [ii] Manufacturing Share of GDP National Currency Units-US Chamber Foundation