China on the Edge of Recession
China is on the edge of recession — excluding Covid, for the first time since 2008 — as new data showed all-important manufacturing contracted for the fourth month in a row with particular weakness in new orders.
In other words, what they’ve got is backlog, then it's a cliff.
Manufacturing makes up a third of China’s economy — much more than the US. While the collapse in China property — another third of China’s economy — is adding fuel to the fire.
Offices Emptier than Covid
London's Financial Times reports that office buildings in China are emptier than they were during the Covid lockdowns. FT notes the whole work-at-home thing hasn't taken off in China, implying the main driver of empty offices is layoffs.
In Shanghai, office vacancies are at 21%. In Shenzhen, China's main export hub, vacancies are at 27%. These are both much worse than vacancies during Covid lockdowns.
To give a flavor, Shenzhen rents have collapsed 15% percent year on year.
Of course, China's official GDP numbers are immune from the storms, but then nobody believes them — not even in China.
Interestingly, not all the layoffs are domestic companies: Foreign investment in China has plunged by a third in the past year as President Xi's authoritarianism is driving out foreign firms.
They’re vacating their Chinese offices and setting up shop in safer places like Vietnam or Mexico, with the factories to follow.
China’s Youth Crisis
The contraction is hitting young Chinese hardest, with youth unemployment jumping to nearly one in four young Chinese without a job.
With a record 12 million Chinese college students about to graduate and hit the job market, they won’t like what they find.
This is all, of course, social tinder. Public protests are now rising in China, with banners on overpasses demanding free elections and ex-soldiers accusing the government of "strangling" service-members.
Labor strikes have jumped, including 1,000 workers in a Nike sweatshop who, ironically, rose up after production was moved to Indonesia. Along with hundreds of strikes by unpaid construction workers as property developers collapse.
The background here is hundreds of millions of Chinese work informally -- you need a kind of domestic passport to move to a big city where wages are decent, and most rural Chinese don't have one.
But you also need 15 years of formal work to get government pensions. That means for older workers, especially those without kids thanks to government birth controls, layoffs could mean literally starving in old age. They're desperate.
What went wrong with the Chinese miracle?
Growth under President Xi has collapsed to half its old rate -- China now grows like a normal middle-income country.
This is because the Mao-worshipping Xi cracked down on business -- even “disappearing” prominent businessmen like Ali Baba’s Jack Ma when they opposed Xi.
Meanwhile, Xi plowed trillions into government-favored industries -- above all green energy and housing. These have both now collapsed with over-capacity and under-demand.
To illustrate, at one point China had nearly 1,500 electric car makers. Almost all have either gone bust or are in the process.
Meanwhile, housing has at least 5 and a half trillion dollars in bad loans, with millions of Chinese losing the half-built apartments they’d parked their life savings into as developers go under.
Between the housing collapse and stocks that have been flat since 2008, Chinese just don't have the money to keep spending, pulling down the economy even further.
What’s Next
Last time China hit recession, in 2008, Beijing dumped massive stimulus into the economy. This time, China's debt -- over $50 trillion -- has grown to the point it can't afford it.
And if China fails? The social contract in China is based on obedience for growth. If the government can't hold up growth, historically Chinese have gotten very kinetic. There's a reason Xi's been installing a police state, but of course if opposition is widespread enough even the police flip sides.
China could be in for a bumpy ride. And if it gets desperate and needs a nationalist distraction, it could pull Taiwan -- and America -- into the storm.
Every week I write an article on the top stories in economics with regular deep dives into history like the Fall of Rome, the Weimar hyperinflation, or FDR’s Great Depression.
I also make daily videos on economics and freedom, posted on X/Twitter, Youtube, and Rumble.
And a weekly podcast with interviews of key figures in liberty and a roundup of all the week’s videos.
I thought the definition of recession was two quarters of negative gdp growth
This is a very disappointing post, Peter.
Why are you joining this "China is the enemy" narrative the politicians and mainstream media are posting daily?
If you took your criteria at scale you could write this same article about at least 30 countries around the would and none are accused of distracting from their economic issues by starting a war.
I respect you but am shocked that you seem to be falling for this short-term stuff the G7 is looking at, especially since you are such a student of history.
Among a large quantity of gems there are always a few bad ones. I think this one counts as a bad one.
Let's get back to gems next week