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Exit the Dragon

Written By Christian DeHaemer

Posted August 16, 2023

Good afternoon, Energy and Capital readers. Yesterday I wrote about the possibility of a second wave of inflation following the pattern set in the 1970s. This surge in prices would be created by a wage-price spiral.

In macroeconomics, a wage-price spiral is the idea that wage increases cause price increases, which in turn cause more wage increases. It's a positive feedback loop that is only possible with tight labor markets, such as the one we have today.

But on the other side of the planet, you'll find the opposite drama unfolding. It’s the see to the saw, the teeter to the totter. In China, people are experiencing disinflation, if not all-out deflation. Disinflation is the slowdown of inflation, while deflation is falling prices.

The numbers out of China recently have pointed the way, and the data is very weak. Retail sales, industrial production, exports, and unemployment are all getting worse.

Consumer prices fell 0.3%. Foreign direct investment hit a 25-year low. Furthermore, the country’s statistics agency has reported that it will stop publishing data on youth unemployment (ages 16–24) after it hit 21.3% in June.

No news is good news.

In more anecdotal news, I came across a video showing Chinese people living in concrete pipes after they had been laid off from factories.

BattleSwarm Blog provided a transcript. Here are some excerpts:

This is because it’s happening in the industrial city known as the world’s factory — Dongguan in Guangzhou… After more than 30 years of China’s reform and opening up, Dongguan, which has always been at the forefront of economic development, has recently seen a wave of business closures and foreign capital relocation.

When foreign capital withdraws, thousands of Chinese workers lose their jobs. Among these people, some have worked in factories for decades and are now middle-aged. It’s overwhelming to be suddenly faced with unemployment and consequential cost-of-living pressures, coupled with labor competition against millions of university graduates.

Foreign companies like Microsoft and Nokia are now moving to Vietnam and India. Japanese companies like Panasonic, Daikin, Sharp, and TDK are planning to move their manufacturing bases back to Japan. Well-known companies like Uniqlo, Nike, Funai Electric, Samsung, and others are also accelerating their withdrawal from China.

You can find the video here.

This seems very reminiscent of what happened in the U.S. Rust Belt 30 or so years ago.

It's hard to determine if a slowdown in the world’s second-largest economy will curb inflation in the world’s largest. But we do know that the Chinese demographic situation is getting worse, not better. It is also obvious that China is in a great deal of debt. Bloomberg estimates total Chinese debt to be 282% of annual GDP.

When deflation hits, the value of debt goes up in real terms, and at some point it will become unsustainable.

The major problem is that all power in China is now concentrated in President Xi Jinping, an ardent nationalist. And we all know when bad economic times happen in a dictatorship, the dictator attempts to stay in power by finding an outside enemy and fanning the flames of war. This unites the people against a common enemy and prolongs the dictator's tenure but eventually ends in misery and destitution.

The upshot of this is that most global international companies have stopped investing in China and are moving operations to India, Vietnam, Mexico, and the like. In other words, China is uninvestable.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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