“A Bucket of Cold Water in the Face”

Bad News for the World’s Second-Largest Economy [The Daily Reckoning] February 13, 2023 [WEBSITE]( | [UNSUBSCRIBE]( “A Bucket of Cold Water in the Face” - Hanging out with the penguins… - “Reality has hit China watchers like a bucket of cold water in the face”… - Then Jim Rickards shows you why China is mired in a “middle-income” trap it may never escape… [***AUTHORIZATION STATUS: APPROVED***]( You’ve been granted temporary clearance to view this urgent market briefing. It contains sensitive materials previously classified by the C.I.A. And now it’s now available to help YOU prepare your money for the next big surprise. You won’t find this information on Google, Bing, Youtube, or DuckDuckGo. You can only see this urgent briefing by clicking below [Click Here To Learn More]( Somewhere in Antarctica February 13, 2023 [Jim Rickards] JIM RICKARDS Dear Reader, I’m currently exploring Antarctica, faraway from all the world’s turmoil. [image 1] My expedition just doesn’t want to end up like the people on the Titanic! This iceberg was a bit too close for comfort: [image 2] But this isn’t a travelogue and you want to know what’s happening in the fields of finance, economics, politics, geopolitics and more. So let’s dig in… I’ve been writing a lot lately about topics such as U.S. politics, the Federal Reserve, the situation in Ukraine and even the threat of nuclear war. But today I want to address the biggest and most complex topic on the geopolitical landscape today — China. China’s importance in global financial markets and geopolitics is undisputed. It has the world’s second-largest economy after the U.S. at $18.3 trillion in annual GDP, just under 20% of total global output. It has the world’s second-largest population after India, with about 1.4 billion people. It has the world’s third-largest landmass after Russia and Canada with about 6.3% of the total dry land on Earth. It has the world’s third-largest nuclear arsenal after Russia and the U.S. with 350 nuclear weapons (although that’s a distant third since Russia has 6,257 nuclear weapons and the U.S. has 5,550 such weapons). By these and many other measures, China is one of the most powerful nations on Earth. Meanwhile, China’s average annual economic growth rate over the past eight years is 10.55%. The compound growth rate over the same span is 123%. Put differently, the size of the Chinese economy more than doubled in eight years. With growth like that, it’s a small wonder that global analysts confidently predicted that China would surpass the U.S. in total annual GDP by 2030, if not sooner. Other analysts said that just as the twentieth century was the American Century, the twenty-first century would be the Chinese Century. Yet few of these predictions, if any, will likely come true. Reality has hit China-watchers like a bucket of cold water in the face. Even the China boosters, affectionately if sarcastically called panda huggers, are waking up to the fact that China is a desperately poor country despite a long list of paper billionaires. A thirty-year hypnotic spell has been broken. The more astute analysts always knew China would hit the wall economically in a bigger, more momentous version of what is known to economists as the middle-income trap. The numbers I cited above aren’t quite as impressive when you take a deeper look at them. Since 2008, China’s average annual growth is 7.20%. That growth rate is 32% lower than the annual rate that prevailed from 2000 – 2007. The compound growth rate over the same span is 182%. That’s substantial, but 182% in fifteen years is not impressive compared to 123% in just eight years prior to 2008. For an apples-to-apples comparison, compound growth over the last eight years was just 56%, less than half the compound growth rate of the eight years from 2000 to 2007. This slowdown in recent years is striking with growth between 9.40% and 10.70% in the first four years (2008 – 2011) compared to growth of only 2.2% to 5.6% in the last four years (2019 – 2022). Of course, Chinese data is routinely skewed to the upside. It is entirely likely that China’s economy actually shrank in 2022 and there is independent data available that suggests exactly that. It’s not enough to blame this slowdown on the 2008 global financial crisis and the 2020 pandemic. China was barely affected by the global financial crisis and posted healthy growth of 9.65% in 2008. The slowdown in Chinese growth, which will continue, is due to even larger forces than financial panic (2008) and pandemic (2020 – 2023). What’s holding China back? Read on. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. If your retirement portfolio has been shrinking in today’s market, it’s not your fault. After all, who could predict big market surprises like: Oil shocks… Crypto’s Collapse… China’s Social Unrest… 40-Year High Inflation… Federal Reserve Uncertainty… Russia-Ukraine Armed Conflict… And looming fears of a global recession… Well, I hate to brag, but I predicted them (admittedly, I didn’t get everything right). But based on my warnings, my readers have been [making money hand-over fist]( with the track record to back it up. In fact, they’ve been seeing one winning opportunity after another, like: - 128% gain in 28 days. - 183% gain in 11 days. - 203% gain in 26 days. How is this possible? It has nothing to do with shorting stocks or buying put options or anything like that. Instead… It’s all part of a [stock market secret that I created with the CIA, right after 9/11.]( Sounds crazy? You don’t have to take my word for it. Because you can see all the proof with your own two eyes, [right here.]( You too can benefit from this stock market secret I created with the CIA. And especially with the way this market is moving, it’s only a matter of time until the next big surprise hits your portfolio. You should be prepared. [Go here now to learn how you can be.]( [Response Requested 1/1000th of an ounce of gold available for you]( As a The Daily Reckoning reader, Jim Rickards is offering you 1/1000th of an ounce of gold when you upgrade your account. It will come in the form of a “Gold Back” - a new type of gold currency that’s starting to spread across America. If you have not responded to Jim’s offer yet, and want to know how to claim yours… Please click the link below for details. Thanks! Amber Anderson Customer Service [Click Here To Claim Your Gold Back Currency]( The Daily Reckoning Presents: Why China might never be a wealthy nation… ****************************** China’s Ensnared in the Middle-Income Trap By Jim Rickards [Jim Rickards] JIM RICKARDS China has fallen victim to what economists call the middle-income trap. Economists consider a low-income country to have around $5,000 annual income per capita. Middle-income countries have between $8,000 and $15,000 annual income per capita. High-income countries begin at around $20,000 annual income per capita. China’s per capita annual income is $12,970 — solidly in the middle income category. By the way, in the U.S. it’s $75,180, among the highest in the world (second to Switzerland). Due to China’s extreme income inequality, it is more useful to think of China as having two populations. One population of about 500 million urban workers has an annual per capita income of about $28,000, while a second population of about 900 million villagers has an annual per capita income of about $5,000. That would put the 900 million villagers solidly in the lower income category, not even close to middle income. And there is extreme income inequality within the 500 million high-income groups such that most of those would have a middle income of about $12,000 per year, while a select few would be earning millions of dollars per year each. China is predominately a low-income country with a significant middle-income cohort and a tiny slice of the super-rich. This income inequality makes China’s climb out of the middle-income ranks even more difficult. And the super-elite cohort is a potential source of social unrest among the less well-off. The conventional wisdom is that the rise from low-income to middle-income status is fairly straightforward. You begin by moving tens of millions (or in China’s case, hundreds of millions) of people from rural villages to cities. You provide decent if spartan housing, public transportation, and attract foreign direct investment to build manufacturing plants. With some training, the city residents become adept at assembly-style manufacturing. Low labor costs allow goods to be assembled cheaply and exported at attractive prices. The cycle feeds on itself with more migration, more direct foreign investment, and expanded manufacturing capacity. Per capita income rises from the low to middle-income range. But to make it to the big leagues of high-income status, you need high technology applied to high-value-added innovation and manufacturing. China lacks this. China advocates seem impressed that 90% of our iPhones come from China. That’s true, but Chinese value-added is only about 6%. If an iPhone costs $1,000, only about $60 goes to China’s net of import costs and royalties. In fact,very few countries (excluding OPEC members) have ever made this leap from middle-income to high-income. The only examples in Asia are Japan, South Korea, Hong Kong, Taiwan, and Singapore. This list leaves many more countries (Malaysia, India, Turkey, Thailand, Brazil, Mexico, Argentina, Russia, Chile, and others) stuck in the middle-income trap with China. High growth from a starting point of low-income to middle-income is not surprising and should be expected. It’s not a “miracle.” It’s just what happens when you clamp down on corruption, build enough infrastructure, and move millions from the country to the city. China’s done that. The key variable in forecasting Chinese growth in the years ahead is therefore technology. Can China not merely license foreign technology (at a high cost), but develop its own technology ahead of advanced-economy competitors? The outlook here is not good for China. [Man Who Predicted Bitcoin Warns: “Don’t Buy Bitcoin!”]( [Click here for more...]( James Altucher first predicted Bitcoin all the way back in 2013… And ever since, he’s been one of the biggest advocates for it. But now, he’s warning Americans that buying Bitcoin could be a big mistake… [Click Here To See Why]( They have shown little or no capacity to invent or produce in areas such as advanced semiconductors, high-capacity aircraft, medical diagnostics, nuclear reactors, 3D printing, AI, water purification, and virtual reality. Projects that China has on display that are advanced (such as their bullet trains that run quietly at 310 kph) are done with technology licensed from Germany or France or are done with stolen technology. China has done little innovation on its own. But the stolen technology channel is being shut down by bans on advanced semiconductor exports to China, and sanctions on the use of 5G systems from Huawei, for example. On top of all that, China faces powerful economic headwinds in the form of excessive debt, adverse demographics, collapsing real estate markets, and a lack of oil and natural gas reserves. The country is also trying to reopen from its pandemic failures at a time when the world may be entering another global recession worse than 2008. China also faces powerful geopolitical headwinds as a result of its genocide against the Uyghur minority, involuntary organ harvesting from political prisoners, concentration camps, female infanticide (over 20 million baby girls killed), suppression of religion, censorship, social credit scores, house arrests, and expropriation from entrepreneurs like Jack Ma of Alibaba Group. Above all, China is handicapped by its return to Mao-style Communism under the leadership of the new Emperor for Life, Comrade Xi Jinping. Xi has largely abandoned the relatively open economic policies of Deng Xiaoping, which prevailed from 1992 to 2007 under the leadership of Deng’s successors Jiang Zemin and Hu Jintao, with an updated version of Mao’s policies which place the Communist Party and its “core leader” at the center of all decision making and economic direction. China’s economic headwinds can be summed up in three words — debt, demographics, and decoupling. There is substantial empirical evidence that national debt to-GDP ratios in excess of 90% result in slower growth. It’s tough to precisely determine China’s, but its debt-to-GDP ratio is probably about 350%. This problem is exacerbated in China by the fact that much of the debt is not spent productively. I have visited construction projects in the countryside of China where entire cities visible to the horizon were being built from the ground up. Along with the cities were airports, highways, golf courses, convention centers, and other amenities. It was all empty. None of the buildings were occupied except by a handful of show tenants. Promises of future tenants rang hollow. The construction did create jobs and purchases of materials for a few years, but the debt-financed infrastructure was completely wasted. The only ways out of a debt trap of the kind China has constructed are default, debt restructuring or inflation. The last two are just different kinds of defaults. The situation does not necessarily resolve itself quickly. The debt burden can persist for years. Just don’t expect robust growth while it persists. China’s birth rate is now below what is called the replacement rate. That rate is 2.1 children per couple. China’s current rate is reportedly about 1.6, but some analysts say that the actual rate is 1.0 or even lower. At that rate, China’s population will shrink from 1.4 billion to about 800 million in the next 70 years. That’s a loss of 600 million people in a single lifetime. If you assume productivity will remain constant (a reasonable assumption if China fails the high-tech transition), and the population drops by 40%, then it follows that the economy will shrink by 40% or more. That’s the greatest economic collapse in the history of the world. In all, the pandemic, demographics, debt, decoupling, technology, and global recession should negatively impact Chinese growth in the years ahead. This growth story inevitably bleeds into geopolitics in terms of a potential invasion of Taiwan and war in the South China Sea. It is no doubt the greatest economic and geopolitical drama playing out in the world today with important implications for all investors. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. If your retirement portfolio has been shrinking in today’s market, it’s not your fault. After all, who could predict big market surprises like: Oil shocks… Crypto’s Collapse… China’s Social Unrest… 40-Year High Inflation… Federal Reserve Uncertainty… Russia-Ukraine Armed Conflict… And looming fears of a global recession… Well, I hate to brag, but I predicted them (admittedly, I didn’t get everything right). But based on my warnings, my readers have been [making money hand-over fist]( with the track record to back it up. In fact, they’ve been seeing one winning opportunity after another, like: - 128% gain in 28 days. - 183% gain in 11 days. - 203% gain in 26 days. How is this possible? It has nothing to do with shorting stocks or buying put options or anything like that. Instead… It’s all part of a [stock market secret that I created with the CIA, right after 9/11.]( Sounds crazy? You don’t have to take my word for it. Because you can see all the proof with your own two eyes, [right here.]( You too can benefit from this stock market secret I created with the CIA. And especially with the way this market is moving, it’s only a matter of time until the next big surprise hits your portfolio. You should be prepared. [Go here now to learn how you can be.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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