China Dependent Upon External Growth For Growth

China was the growth engine that fueled the entire world. Over the last few decades, China put up some impressive growth numbers, a fact that translated into the global economy. Actually, if we remove China from the equation, we see the numbers are rather flat. This single country was responsible for most of the moves higher.

Sadly, this is now done. The Chinese story is over, at least for the timing being. It was something known within China with the "shared prosperity" becoming part of the Constitution. Xi knew the growth story was over, hence China's reluctance to stimulate with each downturn.

The situation gets worse. China is now realizing, due to its massive debt ratio, that it is entirely dependent for growth outside the country to see any back home. In other words, we need a reversal of what took place the last few decades.

Here is where the first challenge enters: the global economy appears to be heading into a recession.

Source

GDP Per Capita

China is a race against the clock.

This is a situation that was well-known. China has a demographic problem, one of the worst in the world. Outside Japan, this could be the next one to fall off the cliff.

Hence, the Chinese were always faced with the prospect of getting old before it got rich. With the population aging as the fastest pace on record, the window for this country is very tight. We are likely looking at 10 years, perhaps 20, before the story is over.

China is heralded for having the second largest economy. Of course, not all metrics are equal. Having an economy that is trailing only the United States might be impressive except for the fact the population is about 4 times the size of the US, the third largest country in the world (by population). Only India has a larger one than China.

When we look at the production of the country, we see another story. The GDP per capita is rather poor. In fact, the last time I looked it ranked about 70th in the world. That is not very impressive.

Is China Doomed To Fail

Many fail to recall there was a time the United States was the world's low cost producer. During the late 1800s, the US was China: the world's (mostly Europe) low cost manufacturing center. This country was the one that flooded the world with cheap goods.

Granted, 140 years ago saw a different world since we were still dealing pre-globalization.

If we fast forward, post World War 2, this role was taken on by Japan. That could was the "sweat shop" for the world.

I bring this up because each situation ended the same: catastrophic depression.

Will China follow suit? The problem with being the world's low cost producer is that, eventually, someone else steps in. Unless an economy has something else to fall back on, it is cooked.

With the US, it took going through the Great Depression but it was able to transition and forge ahead. Japan entered a deflationary spiral that it is now reverting back into. Much of this is due to the aforementioned demographics, creating a perpetual cycle.

China's Inability To Foster Growth

Demographics might make it hard for China to make the conversion it needs. For an economy to mature, it requires consumption. This is what makes the United States so powerful. It is not only the largest economy in the world, it is more than 70% consumption.

China is going to attempt this, which is part of Xi's plan. He stated in 2019 the growth story was over. The world did not seem to believe him. Instead, talking heads on television kept espousing how China would stimulate when things got bad.

It did, right up to the point where Xi got his lifetime appointment. After that, the Chinese are slow to respond with easing.

One of the things missing from China's equation is kids. Anyone who had them knows they are expensive they can be.

Many feel this transition is not going to take place. The next few years are really going to tell us where the future of China stands.

For now, the fact it is depending upon the rest of the world for its growth is not a positive sign.

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