Time
flies!
Almost
eight years ago, I made the following predictions for the five years after that
time:
n. China will face sharp
slowdown in growth in five years (say from 10% to 3%) for many years to come
n Related
emerging markets and commodity producers will suffer as well.
n HK’s housing
price will drop substantially
n Chinese
people may not suffer in their satisfaction
n The world
will not come to an end with the slowdown in China’s growth
n Eurozone will
not survive in the current form
n The U.S. will
become stronger in relative terms if it can get the political act together
The
predictions are almost all correct during this horizon with almost perfect
timing. Before 2011, I have never predicted a turning point of slowdown in
Chinese growth. As I predicted in 2011, there has been a significant return
wedge between the U.S. equity markets and emerging markets and commodities.
From
early 2016, there has been a bull run in all the markets around the world until
January 2018. But other than the U.S. equity, pretty much all the risky assets
of equity and commodity markets have faltered since then, with some dropping
close to the low levels reached in early 2016. So what are likely to happen in
the next five years?
In June
2018, I made most of the following predictions on my WeChat blog about the five
years going forward from then. What will happen in the next five years is
likely to be a continuation of what have happened from 2011 to 2016, especially
the next year or two. The trend of slowing Chinese growth has not finished. The
U.S. growth will not be significantly affected from now but the risky assets in
the U.S. and the world may drop significantly.
I will
also refute many common misconceptions of both Chinese and Western elite (not
mentioning the laymen), including the many so called academic and professional MACROECONOMISTS.
In the last decade or so, the dominant majority of them had little idea about the
direction of the world or Chinese economy as seen in their own records. However,
even if they are right, in reality they have little influence on the course of the
Chinese economy, given the political and economic system and reality in China. In
China, the entrenched interest just do what they prefer.
So here
are the predictions:
· The world
still underestimates the extent of coming China slowdown. The slowdown is real however
the Chinese government manipulate the statistics, and this trend will enhance
and eventually conclude itself. China’s future is at best Japan, as I have
always predicted since 2011. China will become a much smaller portion of world
economy in the coming decades.
· The
Chinese housing bubble are finally reaching its peak given that some
demographic experts that I believe have updated estimate their predicted peak
population has come earlier in 2018-2019 instead of 2022-2023.
· The world
still underestimates the long term strength of the United States after a long ten
year bull run in both USD and U.S. assets. This is despite the fact that the
coming U.S. economic recession, if any, will probably not be very deep. In the foreseeable
future and the whole 21st century, the U.S. will still be the
largest economy and sole superpower in the world. But this probably won’t spare
the U.S. equity markets from a deep drop.
· Most
risky assets of equity and commodities will drop to at least around the low
point reached in early 2016 before the bear markets are over, including the
U.S. equity markets. Shanghai index will drop to at least 2000, and the small
and medium companies will drop a lot more. Chinese Enterprise index could drop
to 700s. S&P could drop from 2900s to 2000s or even
1600s. Emerging markets will lead in the bottoming process.
· China’s
slowdown is not a cyclical story as many believe. It is a one way street. The
growth will not reach the current levels again and will be much lower and reach
0% in the very long term. This is the key to debate about the asset prices of emerging
markets and commodities and about how world will look like in this century.
· How strong
and how soon the bull market in emerging markets and commodities afterwards
depend on how complete the Chinese economy has finished its adjustment to a
much slower growth level and whether there are some large emerging markets experiencing
fast growth.
· The Sino-American
military conflicts that I was concerned is unlikely. Being behind the U.S.
militarily by decades, and becoming relatively weaker and older, China won’t
pose military threat to the U.S. even in Asia.
But the Sino-American
conflicts will be long lasting.
I will
explain the reasons for these predictions below. I also clarify many wrong
believes of the Chinese and Western elites.
The fate
of Chinese economic growth slowdown is already written on the wall in 2011, and
even after early 2016 when the Chinese government tried another round of huge
increase in leverage and housing price. The Chinese government should have used
some mild stimulus to smooth the inevitable drop in economic growth. As I
mentioned in 2011 and afterwards, the earlier they slowed the economic growth,
the better off the country would be in the long run, and there will be more
resources to help households enjoy a better life. The huge stimulus and housing
price increase in 2016 and 2017 result in a sharp bounce in all risky assets
such as equity all over the world and commodities. This also made many believe
that universal economic rules do not apply in China. The drop in risky assets
from early 2018 is just a continuation of the initial drop between 2011 and
2015 after the huge intervention by the Chinese government from early 2016.
The Chinese
government has engaged wasteful investment to secure a targeted GDP growth rate
for so long that it does not have the resources to achieve the target any more
given how big the Chinese economy and particularly the investment scale have
become and how low the return the investment have. It has to resort to faking
numbers to reach the targeted GDP growth rate.
Many people
in China blame the current administration in China or the trade war by Trump about
many economic ills. This is wrong and unfair. The slowdown is inevitable for a
country with the institutions and growth model of China or for most every
country that have grown to the current stage of income level. The long delay
just made it even worse. At the same time, the trade war has already started
long ago during Obama administration, and it is inevitable given China’s trade
practice. However bad, such practice is rational for China.
Many
people in the West start to worry about China’s rise in the last decade, and
the concern intensified and reached more people a couple years ago. I have long
predicted and observed this inevitable conflict and have advised all people I
met to come to America for the longer term if possible due to the inevitable
economic slowdown and the inevitable conflicts between China and the U.S. Trump
is not and probably cannot do much more to China than Obama. As I have said a
long time ago, Obama was uniting the world to exclude China from the rest of
the world supply chain through TPP and TTIP. Trump gives up all the progress
that Obama made and tries to fight the world, in particular China. The U.S.
elite have already recognized the economic and political issues of trade with
China a long time ago before Trump came to power. Trump just yelled with a big
mouth, as he always does, which may be stupid from a strategic point of view. And
China’s slowdown and relative weakening are mostly due to its own failing, not
due to the trade war.
Whatever
the outcomes, one thing is clear. The U.S. will try every means to force global
supply chains out of China. As long as the U.S. has the market and consumers
compared to China, this dramatic change in supply chain will happen. Although
no one single other country may replace China but a group of smaller countries
can certainly take over. Vietnam is just the start. The trend was in motion for
a while already given the increased cost in China, but now it probably will become
irreversible. With the slower growth and being somewhat taken out of the global
supply chain, China’s economic weight in the world will shrink. In addition,
the bigger concern of Sino-U.S. military conflicts may fade as China slows down
and get old dramatically.
Many,
including Yifu Lin, suggest that focusing on manufacturing upgrade help
stabilize the economic growth at the current high levels for a long time. This is
impossible. At the current economic development stage of China and given how large
a glut of supplies China’s manufacturing has already created in the world,
China cannot reply on manufacturing to grow its economy any more. Growing
through service is the only way forward and it also entails much slower growth.
The
common perception held by so many that the younger generations in China are
less ambitious and lazier, which leads to slower growth, is wrong. There was much
more room to grow at the beginning of the reform so success was easier. People
don’t even have enough to eat so they have to work hard. After they have a
decent living standard, the Chinese government still use the growth model of
sucking up households with reduced social safety net, which forces households
to work harder. By now, many Chinese households have much more wealth and
income than before and they also devote much of that to their kids. There is no
need for their kids to work as hard and there are many important things other
than ambition and wealth in life. Of course in return, if you marry their kids,
you marry the parents and siblings, and possibly the whole extended family, because
kids are also treated as an investment for retirement as the developed
countries before they had their social safety net.
Is it
still possible for China to become the largest economy? Yes. They are relatively
close to that goal. The reasons of the failing that are mostly self inflicted. If
the Chinese government can change the growth model of sucking up households
through all the channels I have mentioned since 2011 and transfer wealth to
households, there is some hope of China becoming a developed country and the
largest economy. But it is almost impossible anywhere for the entrenched
interest to give up what they have voluntarily. There is a low likelihood of
peaceful rebalance of the interests of different classes in a system as in
China. Without a healthy and growing domestic market, along with the
deteriorating demographics, China’s growth potential will be constrained
significantly and China won’t have enough clout of the domestic market and
consumers over the other countries to become a superpower to compete with the
U.S. Of course, there is always an alternative in China. The National Bureau of
Statistics can always report whatever growth so that China has the largest
economy if the Chinese government insists. But how many would believe it.
Will
China become such a miserable place with the much slower economic growth? Not
necessarily. Even without fast growth, it is possible that China will become a
more livable place with some conveniences afforded by its big cities that the
West does not have for now. Of course most of the convenience means that you
have to give up privacy completely. But that is a Faustian bargain that many
people would make. That would mean a very strong autocratic country, especially
regarding to their own citizens, and make the Sino-American conflicts lasting
for a long time.
Will
China become an economic wasteland overall? Unlikely. Many industrial areas
will fade into history and disappears as population shrinks. The same happened
to many developed countries. However, with the help of America and Pax American
system protected by America, China has already become an industrialized nation.
That is the most important giant step for a nation in economic growth, just
like Industrial Revolution is much more important than any technology
revolutions afterwards. Unless China screws up internally big time, which
happened almost every time when dynasties switch and the population could shrink
up to 90%, there is no turning back in the economic development level.
Would I like
to see China losing the potential to become the largest economy? Absolutely not.
China’s rise certainly helps reduce the racial discrimination that Chinese Americans
face in the U.S., and many corners of America are still a very racially hostile
to minorities. A China with reasonably economic growth is beneficial for the
world economy. I have tried to presented my predictions, and the remedies for
Chines economy since 2011 to many professional meetings and work on macroeconomic
academic papers on Chinese economy. But the existing system will not listen as I
found out many times. This is not surprising because most of time you could not
even persuade your parents, spouse, and kids to do something that is good for
their health and wealth.
It is probably
that the U.S. will become an even smaller share of the world economy in the
coming decade. But that is not a sure thing, as China slows down and few other
developing countries can muster the power and luck to industrialize. Even if it
becomes a smaller share, its status as the largest economy and sole superpower
does not see any challenger in any foreseeable future. America has many serious
ills, but it still has the best system which is much better than any other
system, just like democracy is the least ugly political system. Although the
correlation between effort and outcome may be only 20% in the U.S., it may be
10% in China, as I told people soon after I came to the U.S. That is double
what’s in China as anyone in solar industry can attest to. Even if the best
solar panel can only transfer about 20% of sunlight to electricity, it doubles
that of panels of 10% efficiency. The top global talent will still prefer the
U.S. as in the post-WWII era.
U.S. equity
markets could drop by close to half, i.e., from 2900s to 2000s and even 1600s. The
drop will likely go through at least three or even four stages, with sharp bouncing
backs followed by another drop, and will take at least a couple years from last
October. This is because few people believe we will have a recession in the
U.S. any time soon, and because any recession, if realized, will be relatively shallow.
However, they underestimate the danger from abroad and some of the vulnerabilities
accumulated in the last decade of growth era, including Trump and the Republicans.
The U.S.
housing market may be a relatively good place to be. Given the relatively
shallow recession, personal income won’t be affected that much. The recession
will lead to interest rate cuts from the Fed, which helps cushion the housing
market.
After the
bottoming of all markets, which will be at least early 2019 and probably later,
we could still have a long bull market in emerging markets and commodities if
some other country, or countries, such as India, could start to create the
demand for commodities again. China will continue a bottoming process of large
ups and downs but once that is finished, even China can have another very long
term bull market. The markets leading out of the bottoming process are likely
to be emerging markets.
