The emerging China shock 2.0 - Ambrose, Brad Setser macro commentator supreme
The first China shock in the 1990s and early 2000s flooded the world with cheap goods and redrew the contours of the global economy.
It let multinationals exploit labour arbitrage, playing off Chinese wages against the wages of blue-collar workers in America and Europe. It lifted both the profit share of GDP and the Gini coefficient of inequality to the highest levels since the Second World War
It rewarded capital while the West’s bottom half was left behind, poisoning our democracies.
The emerging China shock 2.0 is even larger. The Chinese economy is today twice as big as a beast on the global stage as it was in 2007 before the global financial crisis.
It is the mechanical result of structural policies pursued by the Communist Party with the stubbornness of the Ming dynasty at its worst.
This has pushed China’s trade surplus to a record $100bn a month, surpassing the total share of global GDP reached at the peak of the China shock 1.0.
China is the victim of its own strategy. It is already in a classic liquidity trap. Credit demand is falling because people are battening down the hatches and paying off debt. The central bank (PBOC) can no longer gain traction by relaxing credit curbs.
The deeper the country sinks into its post-Minsky funk of debt-deflation and consumer retrenchment, the greater the trade shock for the rest of the world. Chinese companies are having to flog their wares on the global market at cut-throat prices to stay alive.
You could say that China’s rampant overinvestment is at least helping to solve one problem. China is rolling out renewable energy and EVs so fast that it gives the world a chance of stopping runaway climate change.
Ambrose Evans-Pritchard Telegraph 24 July 2024
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