Made in China? Not So Fast

The United States has had a complicated relationship with China ever since the communist leviathan came out from behind the Great Wall and cast its economic shadow across America. Now it appears this relationship – this marriage – between the U.S. and Chinese economies has hit the skids. The bilateral economic bond, which was undoubtedly not joined by God, is headed for counseling in the first step toward separation. The question is: Are these two bound for a divorce, and if so, will it be an ugly breakup or an amicable agreement?

The honeymoon is certainly over. The initial romance that American consumers had with cheap stuff has long since worn off. Having endured the proverbial seven-year-itch of discontent, U.S. shoppers realized that cheap was just another way to say, “it’s broken,” or, “it doesn’t work.” They fumed and fussed, but no solution appeared until a Chinese virus took flight and landed in these United States.

Recently, Liberty Nation’s Andrew Moran wrote about the complexities of this relationship. In an article titled “Big Trouble In Little China As America Severs Ties,” Moran put forth this very idea saying that “the world’s relationship with China may never be the same again. COVID-19 may have been the catalyst to accelerate this trend, or it could have been the straw that broke the camel’s back.” He then went on to make a remarkable statement: “Contrarians would contend that the U.S. has a lot more to lose by severing ties, but China’s economy is a fake one that is built like a house of cards.” This house of cards concept seemed worthy of further discourse. Thus, we provide our readers with the following conversation.

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LKD:  Andrew, in calling the Chinese economy a house of cards, are you saying it is likely to crumble with one good swift exhale from the U.S.?

AM: The Chinese economy was already in trouble before the pandemic and even prior to the U.S.-China trade war. The housing bubble popped, all three levels of government were deeply in debt, and many of the state-owned enterprises (SOEs) required either bailouts or absorption from larger companies at the direction of Beijing. The trade war and the COVID-19 public health crisis exacerbated and exposed the nation’s economic problems, and the only way for President Xi Jinping and his Communist Party to survive is to continually throw money at the problem and manipulate the market to prevent the house of cards from tumbling down.

But this should not be surprising, considering that this was the economic model embraced by China in the 1970s after Mao Zedong passed away. Deng Xiaoping merged socialist dogma with the free-enterprise system, which turned it into a dragon for so many years.

LKD: You state that the Chinese economy is “a Ponzi scheme market comprised of money-printing, bailouts, and zombie companies.” How so?

AM: China’s economic growth was driven by debt accumulation, primarily on the corporate side. China has been using new debt to pay off old debts through the printing press. This is comparable to a Ponzi scheme. Over the last two years, the country’s monumental debt has been placed under the spotlight amid the spike in defaults. China was able to mask it for a long time, much like Bernie Madoff. But all Ponzi schemes eventually fall, and that is what is happening in China.

If the world were not so dependent on China, it probably would have happened a lot sooner. This could explain why its tentacles have expanded to every pocket of the globe, whether it is funding Africa’s ascent or buying up America’s debt.

Late last year, I discussed the situation regarding the increase in Chinese zombie companies. These are businesses that require perpetual bailouts or can only cover the interest on the debt. They provide little value to the overall economy, and they only exist to pad gross domestic product (GDP). Whether it is a bank or a tech firm, once it gets into trouble, the government orders one of its larger SOEs to absorb it to prevent defaults. President Xi said he would limit this practice in his quest to embrace free-market reforms, but that was before the virus outbreak.

LKD: Can Taiwan, Thailand, the Philippines, or Bangladesh really fill the mouth of a behemoth as sizable as the United States?

AM: It really depends on several factors to answer this question, such as the currency exchange rate, business conditions, and price inflation back home. I do not think it will happen overnight because of how immense the global supply chain is, but it is certainly possible that Vietnam, Thailand, and others could fill the void over time.

I think the most important part, however, is that the free market needs to lead the charge. There was a study conducted earlier this year that found manufacturers were already shifting operations out of China in the months leading up to the virus, so there is precedent without any state interventions.

LKD:  And finally, do you think our two countries are headed for a divorce, and if so, will it be “no-fault,” or are we likely to see rancor with alimony attached?

AM: Perhaps President Donald Trump is threatening to push supply chains out of China as leverage to get what he wants in the next phase two trade deal. Maybe China would become so desperate to maintain its export prowess that it would cave to the demands of other major superpowers, which ties into my Ponzi scheme analysis. It needs new growth to sustain old growth, so if North America or Europe diminish trade, it would be devastation for China.

I’m then concerned about one of two things: a new Cold War or a new North Korea. On one hand, you have the constant threat of military interventions and trade wars. On the other, China closes its country, brutalizes its population (more than it is now), and isolates itself from the rest of the world.

Either way, this was supposed to be China’s century, but the basic laws of economics caught up to it. It’s similar to the famous ending of 1949’s White Heat when James Cagney shouts, “Made it, ma! Top of the world!” Edmund O’Brien then says, “He finally made it to the top of the world. And it blew up right in his face.”