The Peter Zeihan Podcast Series - The Downward Spiral of the Chinese Economy || Peter Zeihan

Episode Date: October 15, 2024

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Everybody, Peter Zion here, coming to you from the South Carolina Coast. And today, we're going to talk about the normal things that I talk about when I'm walking on a beach, and that's Chinese violence. I always got that out of the straight taste. Okay, for those of you guys have been watching the Chinese markets and their economic recovery slash not recovery over the last year, you'll notice that it's kind of been a shit year for them. By their own statistics, they're not going to hit their 5% of GDP growth for the year.

and if you talk to private folks who have a more realistic understanding what's going on to China is what's left of the Chinese bureaucratic system. They basically got their own statistics and they're being really useless. We are talking about a borderline recession going out in China, and this isn't new. The Chinese economy stumbled in the fourth quarter of 2019 with the onset of COVID, and aside from a couple of blips here and there, it has kind of been down in the dumps ever since. It would not surprise me. We had an actual forensic audit done on Chinese books.

If the Chinese economy ripplarge over that entire period was actually roughly the same size as it was at the beginning of the period of the Chinese lifestyle, so pathologically about their data, not even out of any sort of malfeasians. It's just a system is designed to brag. And so you get fat data at the local level, much less at the national level.

Anyway, in the last couple of weeks, we've seen a huge number of stimulus matters, a huge number of measures, not huge stimulus, two different things. They've tweaked down the mortgage rate a little bit. They've reduced something called the reserve requirement, which is the percentage of bank deposits that have to be held back at the bank in order to bank loans. I mean, all of these things are mildly stimulatory, but they really don't get to the core issue that China now has so few people. under 50 that there just isn't much of a consumption base that can be gused with anything. And that's before you consider that the government of Chairman Xi Jinping really doesn't see private consumption as a meaningful driver of economic growth from an ideological point of view. The idea that people would spend on themselves as opposed to spend on the state is something

that seems to be a little bit alien to him based on his rhetoric and his speeches. Anywho, it also kind of ignores the point. We've talked a lot about consumption. We've talked about investment. We've talked about trade. But something we don't talk about very often are Chinese banks, which are the method by which capital makes it into the Chinese economy, like Welsh economies.

And that is also completely broken. The Chinese method of encouraging economic activity is to lean on the banks so that they lend to everyone for everything at basically, once you adjust for inflation, zero to negative rates. And if you put a bottomless supply of capital in front of anyone, they will, of course, gorge on it, and you will get economic growth. But whether or not it is stable or sustainable is, of course, questionable. Basically, for those of you in the United States, I've just described subprime, or Enron, or the savings alone crisis. And it's all fun until such time as someone actually

has to start valuing the loans that are on the books. And when you put a huge amount of credit out there, a lot of these just don't work out. So in the United States, the term we use is non-performing loans when one of those loans doesn't work out. And should one and a half percent by value of a bank's loans go into that NPL category, then the government regulator is going to be knocking on your door and forcing you to change your policies in order to get that number down. because once you get over 2%, generally that's when banks start snapping like matchsticks, because there just isn't enough margin on these loans

to generate enough income to then grow out of a number of bad loans. Well, in China, the margin is zero, sometimes maybe even a little negative. And because, let's just say, fiduciary responsibility is not exactly something that translates into Mandarin very well. So you get all these loans that probably should have never been made and a lot more go bad. And by most internal estimates,

China's total NPL ratio for the entire banking sector is somewhere between 5.5% and 6%, which would basically mean that their entire banking sector, on average, is shit out of luck. Does it mean that they're all there?

But for every bank that is below that number, you of course have a bank or two that are above that number. And as a rule, the banks that are least stable are the ones that are not on the coast. As a rule, the inflow of investment, the outflow of exports, and the involvement of foreign money means that the coast tends to run a little bit tighter ship. But as you move into the interior, especially the poorer areas, the more agricultural areas, then it's all about the Chinese state banks, whether they're the big four national banks or one of the smaller regional ones. So if you want to talk about the future

of Chinese economic growth, it's not going to be goosed by changing the reserve requirement. It's going to be improved by getting the banks into a position where they can actually function a little bit more normally, but you can't do that until you dispose of the NPLs. In the United States, every time we've done that, it's only been because we've had a recession that is linked to the financial sector in some way.

So the subprime crisis of 2007 to 2009 and the savings and loan crisis in the 1980, They need to go through something like that, but you're talking about something that is at least an order of magnitude worse, and in relative terms, because the U.S. economy is so much stronger than the Chinese economy,

you're talking about something that's even worse than that. So it's nice that the Chinese stock market is having a little bit of a pop, but none of the underlying issues have been touched at all, and trying to make credit easier at a time when credit has already been overextended is simply going to make the inevitable crash that punch.