Taps Coogan – August 24th 2020

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From the Covid-19 pandemic, to unrest in Hong Kong, historic flooding along the Yangtze River, reports of food shortages, and souring foreign relations, China is having a very bad year.

According to Steve Chiavarone of Federated Investors, that’s unlikely to get better anytime soon, as he compares the China of today to Japan’s infamous boon and bust cycle of the 1980s and early 1990s, a crash that Japan has arguably never recovered from.

Mr. Chiavarone points out three long term headwinds to China’s growth. First, demographics:

“(China) is the most rapidly aging country outside of Japan and it’s not just about the one Child policy. It’s about moving a whole group of folks from farms where you have a large number of children to cities where you tend to have fewer, women being more educated and therefore having fewer children, and also having a problem with immigration. At 1.3 billion people, you’d need a lot of people to move into the country in order to move the needle there.”

Not only is China rapidly aging, it is population is expected to peak as soon as 2023 and its working age population has been shrinking since 2012.

Second, Mr. Chiavarone notes that China is losing is manufacturing advantage:

“Companies went to China for cheap labor, but manufacturing isn’t as labor intensive as it used to be and what you’re left with (in China) is higher shipping costs, higher energy costs, and a lack of intellectual property protections, which all make China less attractive than it was… a decade ago.”

Finally, Mr. Chiavarone notes that China’s global image has been badly tarnished:

“I think the brand of China has gotten hit over the last couple of years, whether it’s intellectual property issues, or a lack of transparency around the beginning of the pandemic, or some of the unrest that you see in Hong Kong, you have leaders around the developed world that are increasingly trying to create incentives for companies to come back to the home country and do less in China.”

We can probably add to that list the internment of over a million Uyghers, continued forced organ harvesting, and the endless threats to invade neighboring Taiwan.  

Hearkening to Japan’s infamous boom-bust cycle 30 years ago, Mr Chiavarone notes:

“All three of those (factors) are in some ways reminiscent of what happened in Japan 30 years ago and we think that (they) really pressure Chinese growth in the long run.”

All of which raises the question: If China is no longer the backbone of the global growth story, what is?

The US?

“Ultimately, the United States is really well positioned to… become that ‘next great emerging market’: cheap energy, easy shipping routes, relatively low taxes, and an educated workforce… I think that’s going to be a big theme that play’s out in the coming years.”

All that is needed is the will to do it.

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