A Glutted Economy

Ever Sold a Used Car without good cleanup?

The answer is no. Have you ever entered a showroom that makes you feel, you entered a warehouse? What if you want to sell and book more profit? Those who are in the stock market, know it well and they time the ‘sell’ when the shares are in the ascendency – a perfect time to book the best. Well, what would you do if you want the FDI to flow into your country? Showcase your country as one of the best destination to invest and do business. While countries like Singapore, Taiwan, South Korea, and Japan chose the organic route, China chose a superficial route, cleaned its car, and put it on display.

A Pompous Display

Well, I have been clamoring for data on China falsifying its GDP. Let me chastise China by sharing a simile. We know of several businessmen, who display false success despite their hollowed debts. Such is the case of China – huge (and hollow) infrastructure, glass bridges spanning deep ravines, tall (empty) cities and buildings, rich (and unemployed) population, massive navy (with ramshackle primitive) ships, huge (untrained) army, and massive (captured) land like Tibet and Xinjian, poverty upliftment (despite rising inflation and unemployment) and above all, an astute (more than Mao-size) leader. You may call it billboard, attractive and intuitive enough to catch the attention and impress.

The Ghost Cities

Below excerpts from Financial Review (Citation link included in references). Even the casual observer driving around China can see that something is wrong. You can see it in the industrial parks that are empty except for a small handful of factories, and in the government buildings that are so large it seems impossible that they will ever fill in with civil servants, and in the airports that only sporadically host an arriving plane, and in the glut of exhibition centres and museums that every town seems compelled to build.

Chengong China – Abandoned Ghost Cities

Economy of Scale

The world across – businesses operate on a specified margin (percentages) and for a manufacturer, those numbers slip further but are compensated because of volume, typically called, ‘Economy of Scale’. China operates on a massive economy of scale. It has smartly created a premium segment, a medium segment, and a low-end segment. So everything sells very well.

‘Zero Waste’ Basket

Of course, the major segments are advanced economies and populated countries, but it shrewdly created multiple smaller market (segments) to sell its substandard products (the waste in a classic scenario) being pushed into these sub-optimally operating economies. Examples abound – from South East Asia, Asia, Africa to East Europe and Latin America. These smaller segments offer China a distinct advantage of recycling lesser quality to the multitude of countries in Africa and other struggling economies. Thus obliterating and reducing waste and saving further. These lower segments also provided a market (and a source of revenue) safeguards it from the whims of the leaders from these advanced economies who dictate terms to China or impose tariffs.

A Trojan Horse – The Land and the Sea Corridors

It is but natural to build a massive arborized network of road, rail, and sea lines to support its customer base and the raw material required to run its industry. Thus paving a way to the five land corridors and the South China Sea, that are central to this thoroughfare. The well known China–Pakistan Economic Corridor (CPEC), the Silk Road Railway (SRR) passing through Xinjiang, Kazakhstan, Belarus, Russia, Germany, and Poland, the China Central Asia to West Asia (CCAWA) Corridor, connecting Western China to Turkey, the New Eurasian Land Bridge, connecting Western China to Western Russia via Kazakhstan and the China Indochina Corridor, connecting Southern China to Singapore, thus establishing a conveyor belt for its State Controlled (Capitalist) the Communist Middle Kingdom. I encourage the readers to visit the link from the Council of Foreign Affairs site to see how China has gobbled up the economies of over 65 nations that have subscribed to its Land Corridors (https://www.cfr.org/article/belt-and-road-tracker)

Building Castle Cards on Keynesian Philosophy

However, BRI, CPEC, SRR, CCAWA, or the new islands or its own 50+ ghost cities – all are infrastructure projects. We all know, infrastructures are capital intensive, and consumes a lot of investments. As substantiated by John Maynard Keynes (aka Keynesian Economy), I agree that the infrastructure initiatives provide a foundation for growth. However, these are cost centers and not a profit centers and the immediate returns are negative. Thus, the only way to keep the wheels spinning is to feed this investment (mortgage) with profits from the accrued business. The key here is “PROFIT AND REVENUE”. Building infrastructure needs finance and people. State can provide finance but availability of disposable human resources indicates that people are deployable for building such massive projects, a reflection of unemployment. Thus, to keep the strife from unemployment at bay, it is best to utilize them for infrastructure construction.

Let us review such massive initiatives in the backdrop of dwindling global demand, rising middle class, and a COVID imposed lockdown. If bankruptcies are common across the globe, so are they ubiquitous in China. However, in China, the nation state funds these bankruptcies. Remember, no growing economy is spared from the ‘middle income’ trap, and China has a vast swath of population that has significantly jumped beyond poverty line to middle income. That indicates it has lost its cutting edge on small manufacturing, a competitive advantage in the past.

Revisiting the Phony Businessman

Let us revisit the phony businessman I described at the outset of this article. If you are that phony hollow bankrupt businessman, and you don’t want to declare bankruptcy, you have to display that COVID-19 is completely controlled, that the economy is not just bouncing but ‘dancing in the rain’. That’s fine for the gullible outsider, but what do we do with that internal strife?

Wars are a distraction to internal turmoil

China has no option but create a war-like situation. South China Sea Discord and The Indo-China Ladakh Skirmishes are a reflection of internal turmoil and a distraction from internal strive. Many thought Xi Jinping is opening several war fronts simultaneously. Is he stupid? No, he is not on a suicidal mission. That’s not what Sun Tzu taught him. He is a smart leader with a vision for China but he is running before he has to walk. He is too ambitious.

China is a nuclear power but not a (superior) military power, as against what it displays. History is rife and reminiscent with several examples, no one can open several war fronts simultaneously and so is true with China. Xi Jinping knows that opening multiple war theatres is a definite failure. Xi’s commitment to China is undeniable, and so the war theatrics are hollow too, especially given the sudden rise of Quad, like a Sphinx in the South China Sea. If Quad is a reality, than String of Pearls in equally an existential threat. Will that mean a war? Obviously not, China wants to intimidate but will not land itself in a war. However, the probability of war rises further, with increasing tariffs and escalation of a trade war because economy is the place where it hurts most.

Grand Deception

However, manipulating the fundamentals is a subterfuge and a grand deception for global investors. If you now recollect the example of the phony businessman, shared at the outset of this article, you will realize what I am talking about. Researchers from The Economist, Pew Research, Financial Times, or Harvard are very likely to share a similar opinion. All we have to do is keep a tight focus on fundamentals and let not China swerve us towards a ‘displayed’ billboard economy.

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Sources:
The Economist | The real deal
https://www.economist.com/node/21792859?frsc=dg%7Ce

https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative

https://www.afr.com/world/asia/chinas-ghost-cities-and-their-multibilliondollar-debt-20180404-h0ybjz

https://gnseconomics.com/2020/02/10/the-stages-of-the-collapse/