The Next 5 Years: China

  • Currency dislocation: With China being the second largest economy (thanks to it being the biggest exporter) of the world, it is easy to forget it is still an emerging economy (by per capita GDP and other metrics per the IMF and World Bank). Emerging economies characteristically owe a lot of U.S. Dollar (the world’s de-facto funding currency) debt (to finance development). As well, for trade alone, 85% of China’s trans-border settlements are in U.S. Dollar. The West’s freezing of Russian assets and trade flow in response to the Ukraine War has created a global U.S. Dollar shortage and a sharply rising USD which portend liquidity and solvency issues for provincial governments and enterprises alike in China. China is trying to mitigate this by arrangement with Russia to import energy and food in Rubles. But until China is completely free from the “shackles” of a U.S. Dollar dominated global economy, it will suffer from the currency dislocation problem.
  • Transport Dislocation: China is uniquely “geographically challenged”. 94% of its population live on only ~40% of its land. Only 15% of the country is arable land, mainly concentrated on the central eastern coast and along the Yangtze and Yellow river valley. Water is plentiful in the south but woefully lacking in the north. Its historical wealth disparity stemmed greatly from this imbalance. Globalization helped China more than any other country on the planet (hence the “China Miracle”), via capital infusion, technology transfers and job/market creation, but most importantly by creating frictionless global transport (for China’s badly needed import and export). Western sanctions in reaction to the Covid War now introduced significant fiction in global transport. Re-shoring in reaction to China’s rolling Covid lockdown will make it worse. This is why China is stockpiling everything. But that only buys time. To boot, the island chains (Japan, the Philippines, Indonesia, even Taiwan) that surround the most populated and productive part of China are a blockade preventing China from expanding into the “blue waters” of the Pacific (i.e. China’s ever-growing naval fleet is boxed in the China Sea). China has never been friends with any of them over history. All of them rely on the U.S. navy, against which China has been ratcheting up saber rattling in the last decade. The escalated tension has provoked formation of The Quad which can easily exacerbate the transport dislocation.
  • Geopolitical Dislocation: China’s Belt and Road Initiative (BRI), a variation of Western mercantilism (“colonize” other countries, extract their resources, turn around and export value-added products to them), is a way for growth abroad. Ukraine was a key partner in BRI and China was Ukraine’s largest trading partner. The Ukraine War majorly disrupted this close relationship for geopolitical reasons (China now has to support Russia in a fractionalizing world). This is a setback to growth abroad (which adds to previously discussed challenges in domestic growth). Mainstream media play up the “China-Russian bloc against the West” narrative, — which is misleading. The partnership between China and Russia is no more than “the enemy of my enemy is my friend”. The two had centuries of border disputes and cultural differences to ever really trust each other. They merely exploit each other as tools and leverage against the West. For Russia, China is a source of funding its war machine (shortly before Russia started invading Ukraine, China lifted restrictions on importing Russian wheat despite previous concerns of potential harm to domestic crops). For China, Russia offers little economic significance other than a supplier of cheap oil during Western sanction. Total China-Russia trade is a mere $147 billion, only 2.4% of China’s total global trade value of $6.05 trillion in 2021. In contrast, China became the largest trading partner of the EU the same year. However, Russia is a key piece in BRI geographically. The Ukraine War forces Chinese state banks to stop financing the Russian war efforts against Ukraine or risk being itself sanctioned or shut out of the world’s most lucrative markets: the EU and the United States. This slows down BRI progress and further sets back China’s growth abroad.

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Morpheus

Morpheus

A Boomer, I write to encourage and inspire Millennials, because they are key to revitalizing a middle class fast becoming extinct.