Fear China.
But not for the reasons you think.
When I was growing up in the 1980s, everyone was worried about Japan.
The country rose from the ashes of WWII with astonishing speed.
It had a GDP that had passed all other countries, save the United States — and that was predicted to happen soon enough.
After all, Japan’s GDP was growing at a rate never before seen… and never before thought possible.
Japanese companies and tycoons were buying up American real estate — including iconic locations like Rockefeller Center in New York City, or the Pebble Beach Golf Club in California. All told, the Japanese spent nearly $300 billion on American real estate — about $750 billion in today’s dollars.
News magazines were filled with stories about how Japan was going to overtake the United States and rule the world’s economy.
And then, a funny thing happened.
Japan got old.
Its population started aging… with birth rates falling and people living longer… creating an enormous drag on the economy.
Expenses and expenditures — mostly pensions and healthcare — went up, while the workforce shrank.
In addition, some of Japan’s GDP growth turned out to be a mirage — fed by government boondoggles that added little to no value to the economy. For example, anti-erosion structures on beaches that actually accelerated erosion, along with disrupting natural systems like coral reefs.
Sound familiar?
China’s Crash is Coming… and Sooner than You Think
China recently released its decennial census.
While most outside analysts think China’s population shrank for the first time in six decades, China’s long-delayed (and probably fudged) numbers show modest growth.
However, China says its population will start to decline in a year or two, tops.
Even worse, the number of folks over 60 grew to 260 million.
That’s a lot of people to support.
It’s also a promising sign of a nation that’s developing. Lifespans increase.
But, at the same time, modern urban work and expenses discourage births. China now has a birth rate of 1.3 children per woman — the same number as Japan (and way below the 2.1 per woman needed to maintain a population).
This seems to be a trap that no developing country has managed to avoid. It’s often called the Middle Income Trap — the early economic gains have already been grabbed, they inexorably lead to a demographic shift, which itself leads to a graying population that acts as an anchor on further progress, just as progress becomes harder anyway.
China’s decades under the one-child policy have simply exacerbated the problem. (It also serves as a nice example of how an economy run by autocrats messes up in ways that market economies don’t).
At the same time, China’s government boondoggles make Japan’s seem quaint. No other country has created entire ghost cities to keep the concrete flowing… while diverting funds from more productive projects, and losing who-knows-how-much to greasing hands and pleasing officials.
China is diverting people’s attention by hiding the debt for all these projects in local budgets instead of the national budget. To the tune of around $2.3 trillion — or likely more, as it’s hard to trust any numbers coming out of the Middle Kingdom’s opaque bureaucracies.
Put it all together, and China is in real trouble.
Indeed, it’s quite likely that China is at its high-water mark right now, and its strength will fade as these economic hardships bear fruit.
But wait! There’s more!
While the demographic trap that awaits all developing nations looks ready to claim China, the state-run economy has a few self-inflicted issues, too…
Shooting Yourself in the Foot to Save Face
China’s authoritarian clampdown has accelerated under President Xi.
Today, mainland China has de facto invaded Hong Kong. The last free press in China was shuttered last month — with its owner in jail and publisher and editors arrested.
The New York Times just ran an expose on China’s propaganda efforts in Xinjiang, where a cultural genocide — or perhaps literal genocide — is taking place.
Forget about the expense of running “re-education” camps for up to a million Uyghurs, filled with systematic brutalization.
Forget the expense of all the medical procedures we’re learning about, like forced sterilization and abortions.
Well, actually, don’t forget about them. There are horrors going on, and we shouldn’t look away.
But in terms of economics, there are bigger concerns.
Like demoralizing a big chunk of your workforce (both the oppressed, and those you send in to do the oppressing).
Like degrading the information that your population consumes, for political purposes.
It takes a while for this kind of assault on truth to bear fruit.
But it always does.
China won’t be able to keep up with open societies when it comes to innovation or entrepreneurship if its people are operating in a make-believe world.
Sure, stealing tech from others can help slow the economic decay that comes when information degrades… but not forever. And it’s a commitment to coming in, at best, second every time.
Finally, there’s Taiwan.
Taiwan in China’s Crosshairs?
It seems President Xi is making reunification with Taiwan a top priority — the planned crown jewel of his legacy.
If China tries to take over Taiwan sometime in the next decade — as is quite likely, especially if the politicos see their fade coming — that will lead to even more pain.
Best-case for China: It gets hit with sanctions similar to those Russia suffers for its Crimean invasion.
Worst-case: WWIII.
Any way you look at it, bad news.
Meanwhile, China is busy fighting with nearly all its neighbors — sometimes just with words, often with ships, planes, and guns.
And, while China’s absolute economic numbers look good thanks to its sheer size, it is not a wealthy country. By per-capita GDP, China is in 63rd place, behind countries like Croatia, Romania, Panama and Costa Rica.
Keeping a country of around 1.4 billion going isn’t cheap. China can’t afford non-stop border skirmishes.
This is not a good position to be in.
This is not the way to achieve lasting prosperity.
And this is definitely not a place where I’d try to grow my money.
Action to Take: Avoid Chinese companies like the plague. They may look good for a few years, but a major crash is likely on the way. You want most, or all, of your Chinese investments wound down by then, if you have any.
Instead, put your money into alternatives to Chinese hegemonies.
For instance, China controls over 60% of the rare earth metal market, and over 80% of rare earth metal processing capacity. MP Materials (NYSE:MP) is the only stateside miner of rare earths, and is spinning up processing plants.
And if Taiwan’s dominant semiconductor industry experiences disruptions, then alternates like Intel (Nasdaq: INTC) will benefit. Especially with the semiconductor shortage already spurring a wave of investment.
Whatever you do, don’t rely on China to keep up its recent pace. Instead, prepare for the country to go through a Lost Decade or two… and to lash out in unpredictable ways as its superpower coronation comes undone.