China Syndrome: Surging Power or Meltdown?

Here are the growing strengths and spiraling weaknesses of this ancient empire today.

I remember, back in my college days, most people in the United States feared the rapidly modernizing Japanese industrial economy would soon overtake the US, replacing it as the world’s leading economy. Everyone seemed keenly aware of how the Japanese were swarming in to buy up US real estate. Soon, the Japanese would own enough of the country to control it. It all never happened, as Japan’s economy eventually went into a two-decade slump that continues today. It has been endlessly kept on artificial life support by the Bank of Japan, which continues relatively stimulative policy.

Today’s threat is also from the orient. The rising Chinese economy is now feared as likely to supplant the US for first place in the world. Texans, certain that China is buying the state out, are restricting the ability of Chinese nationals to buy land in Texas as was once seen in moves against Japan all over the US.

The biggest threat to the US economy is supposed to be the rising yuan, but the truth is that, while rising in the news for importance and somewhat in value, the yuan remains a tiny fraction of the global currency in use. Today’s headlines do tell, however, of how it has suddenly outstripped the dollar for use in one arena — in trade between China and other nations. More than 80% of all international transactions, however, still use the US dollar; but, if the Fed rests on its laurels and poorly manages the dollar, it will continue to slide. Famed big shorter, Stanley Druckenmiller, believes (with his own money where his mouth is) the dollar is now the world’s best short.

China is also rising in diplomatic and military strength simultaneously. On the one hand, it is seen in today’s headlines as the most likely peacemaker between Russia and Ukraine. On the other, it increasingly has many nations alarmed over Chinese dominance in Asian waters where the US has just begun to harbor nuclear subs for the first time in forty years in South Korea, and Taiwan is planning its military drills to focus on breaking Chinese blockades, and US military alliances with the Philippines are being restored.

That said, there are always countervailing forces. China this year started exhibiting major cracks in its powerhouse economy. Chinese stocks have been crashing and have erased nearly half a trillion dollars in value. A whopping 460,000 Chinese companies have closed down in large part due to Xi’s absolutely disastrous Covid lockdowns. Nearly a billion Chinese citizens are in debt, which is high for China, and some are predicting there is no way out for China’s falling economy. As observed historically with Japan, China would not be the first rising star to fade away, and bets against the US economy and US dollar in past decades have all been wrong over the longterm.

Meanwhile, in the US, the banking crisis is resurfacing this week at First Republic, which has lost $100 billion in deposits and seen its stocks crash by another 50% in just one day! Ah well, digital money is now arriving to save the day!

(Headlines covering today’s editorial statements appear in bold below.)