Now mainstream economists are hailing China’s growth model as the new model of state-driven capitalism. After all, China’s economy has urbanized faster than any emerging country in history and has grown faster than any major economy since the 1980s.
But come on!
For those economists to be right, that would mean that governments are better at driving the economy than the invisible hand of free-market capitalism.
And let me assure you. They. Are. NOT!
I’ll concede two points to China…
One, it has realized how powerful it is to move people from rural to urban areas where their incomes and spending rise nearly three times.
And two, it does have the largest population, driven by national pride and the desire to be number one in the world.
But despite its meteoric growth since 1980, China has not taken on higher-end industrial and hi-tech industries like Japan, South Korea, Singapore and Taiwan did, or like many western nations in Europe and North America did.
These Tiger countries, as the East Asia examples are known, were able to move from emerging to developed country status in three or four short decades on an s-curve acceleration of urbanization versus GDP per capita because they went straight for the industries that create higher wages in developed nations.
China didn’t follow that road and as a result its growth has been relatively linear, like almost all other emerging nations barring the list above. The only thing driving China’s growth is its aggressive, government-driven expansion of infrastructure and export-driven industries.
The Southeast Asian countries did the same thing in the 1980s and 1990s until they over-expanded and had a financial and currency crisis between late 1997 and late 2002. Their government-driven policies overshot what the free markets would have done.
Now China has expanded twice as fast and twice as long in the global bubble from 2003 to 2013.
How could it not face a bigger crisis ahead? Especially given that it is the one emerging country that now has plateauing demographic trends and faces quickly declining trends from 2025 onward. While other emerging countries enjoy a demographic peak between 2040 and 2070, China will be trending in the other direction.
I have shown in past books and newsletters how China will grow old before it becomes rich thanks to its unfortunate demographic trends ahead.
I have also shown how China has moved rapidly from 30% to 53% urbanization in the last decade.
And I have spoken of the Chinese government’s double-down plan to move hoards of its rural people into the cities so it can achieve 72% urbanization by 2025. That’s just 12 years from now. And that’s 250 million more low-skilled people dragged off their rural farms and dumped unceremoniously into high-rises in cities.
China is an economy on steroids beyond compare!
How are those rural migrants going to compete?
How are they going to afford an apartment in the city that has the highest price-to-income levels in the world? I’m talking higher than London or Tokyo?
The answer is quite simple: they won’t be able to compete when the government-driven gravy train of endless building and construction jobs slows as the global economy continues to contract ahead.
They won’t be able to afford those apartments, or any services, or even food.
Can it get any worse?
Well, yes, it can.
Look at this chart…
This is the Achilles Heel of the “China Miracle.”
712 million people – 53% of its population – live in cities. Of those people, only 69% are registered urban residents with rights to education, health care and any other social benefits. That’s just 491 million people.
The other 221 million, or31%, are basically “illegal migrants from the countryside!”
They are not citizens. They are simply tolerated when things are good, just like the U.S. tolerated illegal immigrants from Mexico to fill our unwanted jobs during the boom years of the 2000s.
But what happens when the boom turns to bust?
These “illegal im/migrants” are shunned.
Illegal immigrants in the U.S. are now migrating back to Mexico as fast, if not faster than new immigrants are entering. That trend will only accelerate as our economy plunges once again between 2014 and 2019, as we expect. During this slowdown, Chinese city migrants will suffer the same fate.
China is careening headlong into a disaster of epic proportions… and the world seems to be cheering it on.
The country has created an insane infrastructure bubble.
It has the highest vacancy rates in cities, at 25%. What happens when tens of millions or hundreds of millions flee back to rural areas where they are registered and can survive on the land?
When China’s real estate bubble bursts, and it will burst, wealth will evaporate faster than rain on the sun.
Don’t look to China as the model for capitalism. Instead, look to it as the prime example of why top-down government planning and endless stimulus only kills the Golden Goose of free market capitalism.
Steer clear. The dragon is about to implode.
Ahead of the Curve with Adam O’Dell
“When you’re courting a nice girl an hour seems like a second. When you sit on a red-hot cinder a second seems like an hour. That’s relativity.” ~Albert Einstein