Is China in Depression and is that good or bad for America?

The People’s Republic of China could be entering a depression. I think the current Chinese economy has some frightening similarities to 1920s America just before the Great Depression.

Like 1920s America, China has grown fast into the world’s manufacturing center. For example, China had a gross domestic product (GDP) of $734 billion in 1995 that grew to $14.7 trillion in 2020. Comparatively, China had 2.4% of the world’s GDP in 1995 and 17.3% of the world’s GDP in 2020.

Notably, China’s GDP was smaller than Brazil’s in 1995. By 2020, China had the world’s second largest economy, behind only the United States. The US had a $20.9 trillion GDP that comprised 24.5% of global GDP in 2020, Visual Capitalist estimates. Similarly, the US Gross Domestic product rose from around $349 billion 1890 to $1.21 trillion in 1930.*

Is a Great Depression beginning in China?

America’s fast growth ended with the Stock Market Crash of 1929 and the Great Depression of the 1930s. This depression spread around the globe and triggered World War II.

China is facing severe economic problems, including deflation, faltering growth, a collapsing real estate market, and high youth unemployment. These problems resemble Depression Era America.

Most frightening is deflation, which is a collapse of the money and credit supply, leading to a collapse in prices which cuts economic activity. Essentially, people stop buying because they have no cash or credit, causing prices to fall and businesses and markets to collapse. Failing businesses throw more and more people into unemployment, making deflation worse.

Has Depression come to China?

China has slipped into deflation, Business Insider claims. For example, China’s Consumer Price Index (CPI) fell by 0.3% between July 2022 and July 2023. Moreover, Chinese factory gate (wholesale) prices fell by 4.4% in the same period, the National Bureau of Statistics estimates.

Deflation is a symptom of depression, along with faltering growth and skyrocketing unemployment. For example, US prices fell by 33% between Black Thursday (24 October 1929) and President Franklin D. Roosevelt’s (D-New York) inauguration (4 March 1933).*

Frighteningly, some home prices in Hangzhou fell by 25% between late 2021 and August 2023, Fortune estimates. Existing home prices fell by 15% in prime neighborhoods in Shanghai and Shenzhen fell by 15%.

Around 21.3% of 16-to-24-year-old Chinese were unemployed in July 2023, Business Insider claims. In 1933, the United States had a 24.9% unemployment rate.* Hence, China’s youth already face Great Depression level unemployment.

Chinese growth is faltering. For example, Chinese exports fell by 12.4% between June 2022 and June 2023. Similarly, Chinese imports fell by 6.8% in the same period.* Hence, the cycle of breakneck growth driven by ever-expanding exports could be over for China. As it was for America in 1929.

It sounds like a depression is beginning in China. However, it is difficult to get a clear picture because the Chinese government is restricting some economic information.

Frighteningly, one reason for suppressing this information is to prevent a panic. To explain, Chinese officials could fear that negative information could trigger panic sell offs and market crashes.

Is a Chinese Depression Good or Bad?

Disturbingly, some observers think China’s troubles could be good for other nations. CNN speculates that Chinese deflation could “cure American and European inflation,” for example.

Others think a Chinese downturn could help the United States retain its place as the world’s leading economy. I think such beliefs are wishful thinking, because a Chinese downturn will hurt America.

China was America’s third largest trading partner responsible for 10.5% of US trade in June 2023. American companies shipped $10.2 billion worth of goods to China and imported $35.1 billion worth Chinese goods in June 2023, the US Census Bureau estimates.

How a Chinese Depression can hurt America

I cannot see how the US can avoid recession if Chinese trade falls by half. COVID-19 disruptions have already had a terrible effect on US businesses and trade. In November 2022, Apple (AAPL) was losing $1 billion a week because of iPhone production delays in Zhengzhou 9to5 Mac claims.* They make around 80% of iPhones in Zhengzhou, China’s “iPhone City.”

Apple’s problems show the danger a Chinese Depression poses to America. China (including Hong Kong) is still the principal source of many American goods.

For example, 40.7% of US imports came from China and Hong Kong in 2022, S&P Global Market Intelligence estimates. That number fell by just 1.7% from 42.4% in 2021.*

This shows the danger. There is no alternative to China for many companies. China is still the world’s factory with 28.7% of global manufacturing output in 2021, Safeguard global estimates. No other nation comes close to China’s industrial might.

The United States was number two with 16.8% of global manufacturing output. Japan was number three with 5.3%. India, often touted as a China alternative, was number five with 3.1% of global manufacturing output.

I think decoupling from China is an impossible dream. We are just too dependent on Chinese industry.

The Nightmare Scenarios

I think a Chinese depression could trigger one of two nightmare scenarios for the United States.

The worst-case scenario is a collapse of Chinese production because of a lack of credit and civil unrest. Consequently, many American companies, such as Apple, will have nothing to sell. This will lead to empty shelves and falling sales at Walmart (WMT) stores and Amazon (AMZN) fulfillment centers.

That could lead to unemployment if Walmart and Amazon lose money and lay people off. Walmart was America’s largest employer with 2.3 million employees in 2021. Amazon was America’s second largest employer, with 1.608 million workers in 2021.

This could devastate hundreds of communities. Walmart operated 4,631 stores in the US on 7 August 2023. There were 515 Walmart stores in Texas alone. Moreover, Amazon operated 1,137 distribution centers in the US in January 2022, with plans to open 331 more. Instead of economic dominance, America could join China in the land of Depression level unemployment.

The second nightmare scenario is that Chinese production costs will fall so low no other country can compete. Chinese companies could flood all markets with cheap goods destroying all competition.

This not impossible. During the Industrial Revolution, British factories flooded market after market with cheap goods destroying many economies, including India’s. This led to the British Empire’s domination of the entire globe. I think Chinese leaders are trying to replicate the 19th century British success.

World War and Global Chaos

I fear a Chinese Depression because the Great Depression put the world on the road to World War II, the Holocaust, the atomic bomb, and the Cold War.

For example, the collapse of the Japanese economy led to a military dictatorship that invaded China in 1937, launching World War II. The collapse of the German economy brought Hitler to power. In 1939, Hitler, imitating his Japanese friends, invaded Poland, bringing World War II to Europe.

Hence, a depression could fuel misery and civil unrest that could bring extremist regimes dedicated to launching World War III to power.

Will Depression make China Stronger?

Strangely, a depression could make China richer and stronger, and more economically dominant.

To explain, US real Gross Domestic Product (GDP) grew from $1.110 trillion in 1929 to $1.223 trillion in 1939 to $2.353 trillion in 1945. US GDP grew in the Depression and World War II for several reasons.*

First, the Depression cured America’s income inequality by reducing the number of US millionaires from 20,000 in 1929 to 13,000 in 1944. This leveling reduced millionaires’ political power allowed Congress to pass the Revenue Act of 1935, which imposed a 75% wealth tax.

Second, the New Deal gave America a social safety net for the first time. For example, Social Security provided a basic income for the elderly and unemployment insurance kept jobless workers out of poverty. The New Deal made America stronger by preventing civil unrest.

Third, the Herbert Hoover (R-California) and FDR administrations and Congress strengthened the US financial system with radical reforms. For example, the Reconstruction Finance Corporation (RFC), a federal agency, made direct loans to business and loans. The RFC financed the construction of infrastructure, including the dams that powered industry in World War II. Similarly, the Federal Deposit Insurance Corporation (FDIC) strengthened the US banking system by insuring most accounts.

Third, the Federal government spent vast amounts of money on World War II which restarted the economy through vast increases in industrial production. Prosperity returned and stayed because of wartime spending.

By 1945, America was the world’s most dominant economy because World War II had devastated its rivals Britain, Germany, and Japan. In particular, the British Pound Sterling lost its reserve currency status, making the US dollar the world’s only reserve currency. Consequently, US politicians could force their economic order on the world at the Bretton Woods Conference in 1944.

One reason the Japanese militarists and Hitler launched World War II was that they thought the Great Depression had devastated America. Japanese and Nazi leaders thought America was weak, leaderless, and bankrupt. Moreover, they thought America was incapable of arming its own military.

Axis leaders remembered President Woodrow Wilson’s (D-New Jersey) clumsy World War I mobilization in which American troops arrived in France with no weapons. Doughboys went into the trenches with British and French weapons. For instance, artillery officer Harry S. Truman’s US Army battery used French 75 cannons because no American guns were available.

Fortunately, in 1940, US leaders had been planning for war for over a decade. For example, General Douglas MacArthur and Major Dwight D. Eisenhower were working on industrial conversion plans as early as 1930.* There were elaborate plans to convert American industry to war production and institutions to finance that transformation. Hundreds of new US aircraft factories were under construction by 1939.

During World War II, America became the Arsenal of Democracy. US factories produced almost two-thirds of Allied military equipment. American factories supplied the US, British, Canadian, Soviet, Indian, and French militaries with much of their equipment.

American factories built 297,000 aircraft, 193,000 artillery pieces, 86,000 tanks and two million trucks as US production doubled. The Soviet victory on the Russian Front and the British Empire victories in North Africa and Burma would have been impossible without American supplies.

Japanese and German leaders failed to anticipate the Arsenal of Democracy, because of prejudice and ideology. They thought America was weak because it was a democracy, a capitalist country, and a “mongrel nation.”

Today, American leaders dismiss China because it is a Communist country, not white (they don’t say this publicly, but it’s clear), not Christian, not “Western,” and not a democracy. Arrogantly, President Joseph R. Biden (D-Delaware) and his advisors think they can throttle Chinese development with a few restrictions on semiconductors. Prejudice and ideology now guide America’s foreign policy. Replicating the stupidity that destroyed the World War II Axis.

I think this economic warfare will fail because the architects of the Russian sanctions are behind it. Those economic warriors’ track record is terrible. The sanctions have failed to stop the idiotic Russian war in Ukraine, although they are creating economic misery in Russia. The sanctions are failing because Vladimir Putin’s actual constituency, the oligarchs, are making fortunes by selling raw materials to Chinese customers.

Moreover, the People’s Bank of China (PBOC), is using the sanctions regime to market its alternatives to the dollar-driven America-centric financial system. For example, 1,280 financial institutions participate in the Cross-Border Interbank Payment System (CIPS) which processes payments in Chinese yuan.

The CIPs is an alternative to the Society for World Interbank Financial Telecommunication (SWIFT) which processes payments in US dollars. CIPS is part of the PBOC’s campaign to present the yuan as a dollar-alternative.

This campaign is working. The Banco do Brazil will guarantee Chinese yuan payments for Brazilian exports, Brazilian Finance Minister Fernando Haddad announced. Banco do Brazil will convert yuan into Brazilian reals for Argentine customers.

This enables Argentine farmers, whose principal market is China, to buy Brazilian goods with yuan. Argentines are using yuan because there is a drastic dollar shortage in Argentina. Notably, executives at US appliance maker Whirlpool are considering accepting payment in yuan in Argentina, Bloomberg claims.*

Argentines who lack dollars have yuan. Bloomberg claims yuan comprises 28% of Argentine forex transactions. Tellingly, the Central Bank of Argentina allows Argentines to deposit yuan in savings and checking accounts, Yahoo! Finance reports.

Hence, Chinese finance and industry now dominate Argentina and are making inroads in Brazil. Cynics will say China is winning the economic battle.

Hence, those who want a Chinese Depression to help America had better be careful what they wish for. For example, a Depression could force the Communist Party to fix some of China’s social problems, such as income inequality, lack of single-payer health insurance, low birth rates, and youth unemployment. Making China stronger just as the New Deal made America stronger in the 1930s.

The depression could cement Chinese Economic Dominance just as the Great Depression and World War II led to US economic domination.

A Chinese Depression will change our world. Hence, we need to examine the Chinese economy carefully because it affects our lives.

*https://www.visualcapitalist.com/cp/the-worlds-largest-economies-1970-2020/

*https://www.newgeography.com/content/005050-500-years-gdp-a-tale-two-countries

*https://www.businessinsider.com/china-economy-recession-inflation-deflation-xi-jinping-stimulus-cpi-ppi-2023-8#:~:text=China%20slips%20into%20deflation%2C%20fueling%20more%20calls%20for%20economic%20stimulus&text=Shop%20and%20factory%20prices%20both,time%20in%20over%20two%20years.

*https://www.thebalancemoney.com/unemployment-rate-by-year-3305506

*https://www.thebalancemoney.com/unemployment-rate-by-year-3305506\

*https://www.businessinsider.com/china-economy-june-trade-data-imports-exports-2023-7

*https://fortune.com/2023/08/17/china-home-sales-worse-than-official-data-real-estate-crisis/

*https://9to5mac.com/2022/11/30/apples-dependence-on-china-2/

*https://www.census.gov/foreign-trade/statistics/highlights/topcm.html

*https://www.spglobal.com/marketintelligence/en/mi/research-analysis/sourcing-shift-from-china-pulls-us-import-share-to-more-than-a.html

*https://www.safeguardglobal.com/resources/blog/top-10-manufacturing-countries-in-the-world#:~:text=China%20%E2%80%93%2028.7%25%20Global%20Manufacturing%20Output,-Situated%20in%20East&text=It%20is%20the%20world’s%20most,total%20global%20output%20for%20manufacturing.

*https://www.statista.com/statistics/1031678/gdp-and-real-gdp-united-states-1930-2019/