Submitted by Taps Coogan on the 23rd of December 2019 to The Sounding Line.

Enjoy The Sounding Line? Click here to subscribe.

Tony Nash, China expert and founder of Complete Intelligence, recently spoke with Wall Street for Main Street’s Jason Burack about the effects that the US-China trade war are having on China’s economy and global supply chains. Mr. Nash warns that official Chinese economic numbers are substantially understating the severity of the manufacturing slowdown and that data suggests that there is now over seven Chinese Yuan of new debt per yuan of economic growth. He also believes that the entire world, from China, to Europe, to the US, will be a loser from the inevitable slowdown of the Chinese economy and an eventual ‘credit event.’

 

Some excerpts from Tony Nash:

“(China) is definitely not the lowest cost manufacturer… and one of the real problems in terms of manufacturing, when you look at China, is South East Asia and Mexico. When you look at China’s top ten exports to the US, you gets things like telecom equipment, computers, televisions, those sorts of things. Mexico is becoming increasingly competitive with those higher end, middle end, goods. Part of the reason Mexico is becoming more competitive is USMCA. Another reason Mexico is becoming more competitive is the deregulation of electricity rates in Mexico two years ago. As power prices have been deregulated in Mexico, it brings down the cost of manufacturing and power intensive industries are more attracted to Mexico. So when China joined the WTO, there was a push factor out of Mexico. It wasn’t just the magnetism of China. It was electricity prices that pushed a lot of these guys out… When you look at other exports that China has, things like furniture, chairs, toys, suitcases, these are all in the top ten exports to the US, …the labor portion of those costs and the competitiveness of other parts of Asia is so heavy that some of these things just should not be produced in the part of China where they are now …China is being competed out at the top end and it’s also been costed out at the bottom end…”

“Some of my friends who are in the electronics manufacturing sector, on recent trips to China in November, told me that major factories in China, their order books are down 30% year-on-year… These are not the data that we are seeing in the official PMI figures. They’re not the data we’re seeing in exports and other things. But, first hand observational evidence of visiting major electronics factories in China is that these guys are down 30% year-on-year. Part of that is the tariffs are forcing a rotation out of China and part of that is other countries are just becoming more competitive…”

“China doesn’t necessarily have those unique and compelling factors that it had ten or fifteen years ago, where you just had to be there… The substitutionality of export locations is relatively new…”

“What we’ve been saying for quite some time is that the Asian Century, as it’s been called for 20 years, is effectively over because nearly all of Asia has borrowed against the next 30 years to fund the last ten years… They’ve done it at an incredibly fast pace and when you do that, things slow..”

“Most rapidly growing economies end up having a credit event and after that credit event they move into a kind of a maturity phase. Look at Korea in the late 1990s and so on. It doesn’t surprise me that China is in the situation that it’s in, in terms of credit…, because they haven’t felt the consequences of over overextending themselves and there has to be some sort of credit event for the government and for industry and households to really feel the accountability for overextending themselves. Now, of course that will be shielded. Every country shields their citizenry from credit events these days. So, the effects will be muted from the ground level, but they’ll still be felt. So that’s coming. Is it coming next year? I don’t think so. These things always last a bit longer than any forecaster ever thinks…”

“…Given the state of the Chinese economy, it’s quite plausible that we see significant weakening of the CNY (Chinese Yuan) over the next say two, three, four years… if there is a hardening of the US-China trade relationship, then I think China has real problems…”

There is much more to the interview, so enjoy it above.

If you enjoy reading The Sounding Line, please consider recommending it to others so that we can grow our readership. To be notified when we publish a new article, click here to subscribe for free.