Observations on China
I watched Blade Runner again the other night. Great movie but was hilarious in one sense. It was shot in 1982, during the peak of the "Japan will take over" phenomenon. Everyone spoke Japanese and "Japan will take over" propaganda was in full swing throughout the movie. Today, we've been told the red wave is coming, China is going to take over and it is inevitable. But the time has arrived and I am calling it - Peak China.
My favourite economist is Franco Modigliani for his work on life-cycle economics. Countries can control for and influence many short & medium term factors. But long-term generational demographics are impossible to disregard and difficult to address, they are ones that make-or-break economies.
Covid and trade tensions meant that western countries (particularly the US) take note of the reliance on China, compelling them to relocate assets to more "friendly" nations. This recognition has led to significant governmental efforts to promote reshoring (ahem, CHIPS act & FABS act in the US). And while Western nations continue to deliberate on reshoring and the private sector responds gradually, this transition is largely propelled by public policy where governments ask shareholders to take a hit to profitability. This reshoring is a gradual process and implementation of public policies simply don't hold the same urgency for private entities as it does for authorities.
Yet, for China, trade wars and reshoring has become an existential predicament and their response has been incredible. Let's take for example the restrictions on semiconductors aimed at impeding Chinese access to cutting-edge technologies. Despite these hurdles China has made remarkable strides, producing chips that have identical performance to technologies from Samsung and Qualcomm despite the export controls and limitations to access IP. It is only a matter of time before Chinese semis production dominates the world, how long can TSMC hold onto their edge? This semiconductor story is probably the most insightful look at how China has managed to reshore faster than western nations.
Yet despite wins in the face of foreign adversity I still think China is faced by an incredibly challenging situation. They can try to waltz around the problem, but there is absolutely no escape from the fact the population bust is right upon them. No amount of stimulus or active policy is going to change that fact, they're simply not having enough kids and the population is aging rapidly.
This is the Japanese population bust on steroids, like nothing anyone has ever seen.
The constant argument I see is the Chinese economy is going to move from an export-led economy to a consumer-led economy. How one can say this with a straight face is a wild, this is absolutely not the case as you consumer is aging rapidly. The population is slowly turning from one of production to one of retirees, the demographic time bomb has arrived.
The population has peaked, the Chinese property pyramid scheme has run out of the next incremental buyer, economic growth has stagnated, and their currency is still pegged. How can anyone still be bullish? History doesn't repeat but the Japanese experience for investor returns is prescriptive of what China may face.
This is as good as it gets for China.