Did We Just Pass Peak China?


5 - 10 years




Avoiding Disaster

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 US – 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 NYC, or the Pebble Beach Golf Club in CA. 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 US and rule the world's economy.

And then, a funny thing happened.

Japan got old.

It's 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.

And then there's the fact that 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, like 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 just released its decennial census.

While most outside analysts think that China's population shrank for the first time in six decades, China's long-delayed probably-fudged numbers show modest growth.

But even China's numbers say the country will start losing population in a year or two, tops.

Worse for the country, the number of folks over 60 grew to 260 million.

That's a lot of people to support.

It's also a 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. China's decades under the one-child policy has simply exacerbated the problem (and serves as a nice example of how an economy run by autocrats mess up in ways market economies don't).

They built it; no one came. Getty Images.

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.

China has hid the debt for all these projects in local budgets instead of the national budget… but it's there. 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 as well…

This state-run economy has a few unique self-inflicted issues too.

Shooting Yourself in the Foot to Save Face

China's authoritarian clampdown has been accelerating under President Xi.

Today, Hong Kong has been de facto invaded by the mainland. The last free press in China was just shuttered last week – its owner in jail, 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 Uighurs, filled with systematic brutalization.

Forget the expense of all the medical procedures we're learning about, like forced sterilization and abortions.

Well, 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 awhile for the results of 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.

Espionage can help slow the economic decay that comes when information degrades… but not forever.

Finally, there's Taiwan.

It seems that 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, they get 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 and planes and guns.

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.

If Taiwan's dominant semiconductor industry experiences disruptions, then many also-rans like Texas Instruments (Nasdaq: TXN) will benefit. Even more than they are today, with the semiconductor shortage 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.

Riding the Edge,

Ryan Cole
Editor-in-Chief, The Edge Investor