The Duran Podcast - Deflation and China's new economic reality

Episode Date: August 13, 2023

Deflation and China's new economic reality

All right, Alexander, let's talk about the Chinese economy. We have imports falling. We have exports falling. We have deflation. What is going on with the economy in China? Yeah, I think that this is now becoming an important story because, of course, when China came out of lockdowns, most people, including myself, by the way, anticipated that there would be a huge surge in demand and that the the Chinese economy would take off and that we'd be looking at a period of double-digit growth in China. That has absolutely not happened. It's clear that just as elsewhere around the world, in Europe in particular, the lockdown situation has actually had a long-term effect of depressing demand and depressing economic activity. The same has happened in China as well. And I would add perhaps to an even greater extent, given that the lockdowns were so prolonged there. So it is taking China a very long time

to shake off the lockdown, the lockdown hangover, if you like. And that depression in demand is resulting in declines in Chinese imports. Now, one can't just explain this by the fact that there are problems with lockdowns, you know, that there's this after effect of the lockdowns, because it's also clear that Chinese exports are now falling and they're falling fast. And the reason

that is happening, and this is, I think, an important thing to understand is clearly there is growing collapse in demand across the global economy. And that points to my mind. In fact, the strongest sign that a major recession is on the way. I mean, a major recession in Europe, in the United States also. People have been talking about a soft landing there, but Chinese exports to the US are falling as well. All of this is now becoming cumulative. So we look like we're heading towards a major recession.

Now, the fact that Chinese export revenues are also declining, is creating a feedback loop into China. It means that revenues from exports are depressed at a time when internal demand continues to be depressed. That is what is leading to deflation because the economy is subdued. The Chinese government, I think, is concerned about this. They recently sacked the chairman of the central bank.

He was somebody who was opposed to a monetary, easing and a reflation. I think the fact that he's been sacked means that somebody else is going to be brought in who's going to be more accommodating and I think that the Chinese government over the next few weeks is probably going to

announce a big package of extra spending and extra monetary stimulus to get the Chinese economy itself moving. So we're probably going to see that happen at some point over the next few months. But it is going to be import, it is going to be domestically driven

growth. It is not going to be export-driven growth because the major factor that is pulling things down is the collapse and demand, especially amongst the economies of the West. Right. Is the Chinese economy in trouble? Because you hear a lot of Western mainstream media reports talking about how the Chinese economy is not as strong as many people think it is. Well, it clearly is going through problems. And of course, there has been a build-up in debt, and there's been over-excess construction, and all of those things. I think that given the very controlled nature of the Chinese economy,

these are not problems that are incapable of solution. I think that, as a major monetary stimulus, a major expansion of, the economy in that kind of way, will probably get growth levels up again. Now, the thing I would say about that, though, is that China still needs to work on this long-term need to move away from exports, to develop its domestic economy more, to allow higher spending amongst its people. It hasn't yet fully completed that transition. And this is going to be a complex and difficult operation to undertake. And it might take some years.

And one way or the other, I think this is another thing to say, is that the years of, you know, double-digit growth in China have definitely gone. The years of high growth, you know, 7, 8%, are probably gone too. the Chinese economy will probably, at the end of this change, settle into the kind of growth rates that you would expect of an established, rich economy, more like, given the stage that China is in in its development, 4 to 5% growth, perhaps even 3% to 0% growth on occasion, not the 7, 8% growth and the double-digit growth is now.

out of reach. So I think China has reached that point where we have to acknowledge that it will continue to grow faster than the economies of the West. Europe is probably going into recession, well, definitely going to recession. The United States probably also is China will continue to grow, but it will never grow at the pace that it did in the years both before the pandemic and even, to be honest, a bit before that. Right. I imagine if China's going to focus more on domestic needs. Yeah. That's going to be good for a country like Russia. Oh, yes.

Which I imagine China depends on the resources that Russia has to deliver to China. it probably means that if they're not going to focus so much on export, it probably means that it's bad for, say, Europe, for example, because China's not going to be focused so much on trade with Europe. Is that a correct assumption? Absolutely. It's a simple assumption, but, yeah. It is absolutely the correct assumption.

If you look at the one country where trade is now absolutely surging, China's trade is absolutely surging, it is Russia's. Now, Russian-Chinese trade was something like 100,000. $130 billion in the first six months of this year. So it's likely to be well over the 200 billion target, which is what Putin and Xi Jinping had been discussing a short time ago. Now, bear in mind that US trade with China, I believe is usually around $600 billion.

So Russia has come from nowhere to being about the third in terms of, you know, a trade partner, a third of the size of the US. And that's going to increase. I mean, we're still at a relatively early stage in this developing, in this growing expansion of this trade. And you're absolutely correct, because Russia produces the raw materials the China needs. It produces the oil, the grain, the gas,

which is going to come before long. it's very rich in other minerals, nickel, magnesium, you name it, it produces it. And given that China has up to fairly recently relied on these huge exports to buy in these critical imports, if export revenue is going to start to fall, it needs to develop its trade relations with countries that are the major commodity producers. you can see that China is now focusing on Iran and on Saudi Arabia, but of course the big one is going to be Russia. And in the West, this is something that perhaps, again, we underestimate it. I mean, if you'd live through the 1970s and the 1980s,

you would know that those were periods of high inflation in the West. And I think it's now become increasingly clear that one of the factors, In fact, the key factor that took the edge of inflation, that brought inflation not just down, because people like Paul Volcker brought it down, but sustainably down through the 1990s and the 2000s, was the fact that the West was able to import food and energy from Russia and finished goods from China. They were having those two big exporters, all those things to the West were taking the edge of inflation.

They were depressing prices. Now, if China is going to start exporting less, and if Russia's exports of food and raw materials are going to China instead, then that downward pressure on prices in the West has gone forever, and we might face a world in the West in which inflation is going to. to be significantly higher than what we have been used to over the last 30 years. Yeah, I mean, I'm going to make another simple statement that decreased trade with China, decreased exports from with China, imports from China, and the cutting off of resources

from Russia. The West is not moving in a good direction, it seems. No, no, not at all. Absolutely not. I'm going to add one other thing, actually, which is going might make people even more alarm. I mean, there is a degree of overcapacity in Chinese industry. Of that, there is no question. I mean, China now accounts for, is now has a manufacturing industry that is bigger than that of the West and Japan combined. So there's probably quite a lot of overcapacity there. The United States in the 30s, itself in the same situation. How did it get out of that?

It did it by increasing production of weapons. That's what happened during the Second World War and it was also what happened in the early years of the Cold War. Now I cannot imagine that the Chinese government is thinking of solving its economic problems in that way. But if there is an arms race, then the Chinese have an awful lot of idle capacity that they could bring to bear in trying to keep up with or indeed overtake the US. It would be a little bit like the US versus Germany in the 1940s. I mean, it would be that kind of struggle. And it might actually solve some of China's current economic problems. So I think people in the United States might. I just want to keep that in mind.

I agree. All right. The durand. Dot locals.com. We are on Rumble, odyssey, pitch, shoot, telegram,

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