Top of Mind: Why China May Face Deflation | Aspen Funds
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Top of Mind: Why China May Face Deflation

Join co-hosts Bob Fraser and Ben Fraser as they dive deep into China’s economy, addressing a phenomenon that has taken experts by surprise — deflation. This episode delves into the unexpected aftermath of China’s strict COVID lockdowns, revealing a sluggish economy with deflationary concerns. Delving into the factors contributing to China’s unanticipated economic challenges, they provide listeners with a deeper understanding of its global repercussions.

Mexico Gains Increased Share of US Imports Chart –

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Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of Your favorite podcast, invest Like a Billionaire. Today we’re doing another top of mind segment, and so these are shorter topics usually between Bob and I where we’re just discussing a recent article that we have been reading.

Things have been just noticed in a broader economic sense and just wanna report to you more real time of things that are going on as they’re happening and just help you make sense of all the information that’s out there regarding the economy. And all the things going on. Bob, you wanna share a little bit of just some of the things you’ve been reading just about China and they’re actually having inflation, they’re actually having potentially the opposite problem.

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Bob Fraser: So it the, it’s some really shocking news coming out of China and so China of course had these really draconian, covid lockdowns where they shut down entire city blocks and apartment buildings, just locked the doors and these kinds of things and just shut down everything.

Zero covid policy, right? And so as that, the policy is ending, everyone expected, okay. The Chinese economy is roaring back. The Chinese economy is incredibly slow right now, and it’s in the bad and in doldrums. They just showed an economic growth of 6.3%. For China, which is well below what analysts had been expecting there’s all these stories coming out about youth unemployment rates.

So the youth unemployment rates Are running around 20% of people don’t have, the young people don’t have jobs, and the issue is they don’t want the kind of jobs that are available in China. They don’t want manufacturing jobs anymore. They want jobs that are high tech jobs. A lot of these young people have gone to university.

They’ve got their degrees and they want these high tech jobs, and there’s very few of those. So there’s a big mismatch. The workforce is the available workforce from the available jobs in China. And this is really a demographic problem too. So if you following, 

Ben Fraser: let’s pause there because that’s just so fascinating ’cause you compare and contrast that with the United States where we’re at, very low unemployment and we actually have pretty massive labor shortages, china’s kind of having the opposite problem and especially in the younger employer segment I. You said there’s something like 20% unemployment, possibly 

Bob Fraser: But there’s still labor shortages. Okay. So the issue is they don’t, they can’t fill the manufacturing jobs. They don’t want the whole influx.

China’s growth was driven by the kind of the rural workers, moving to the urban settings and these farmers being trained in factory work. There’s not a lot of migration happening anymore, and what’s happening is you’re seeing the demographics of China are crazy.

The number of workers for the next 75 years through the end of the century the number of workers in China is slated to decrease by two thirds. It means that China will have one third the workers it has today. Wow. This is insane. And their population will be half that is necessarily deflationary, right?

So gross domestic product is the measure of an economy, and it is basically, population is the main driver of G D P. So if you have, a billion people and e their productivity per person is X, then you have a billion X G D P. So if you cut that people, there’s a number of people by half your G D P drops by half.

So this is, their economy drops by half. So this is the big picture we’re seeing. So they have these, this problem where they have these jobs available. They’re actually is a worker shortage, but they don’t have the, they don’t have the right kind of workers to go fill those jobs.

And so we’re seeing a pretty big mismatch coming there, slowing growth, higher youth unemployment, and that youth unemployment is a problem. You get a lot of disaffected, angry young people, could we see a Tian and square thing again? Furthermore, you’re seeing, China’s imports and exports dropped by double digits.

What I mean is, imports and exports drop by double digits. So you’re seeing their exports dropping. What’s going on with that? What’s going on with that? There’s a couple things. There’s a couple things. One is that global growth and impulse is slow, right? The global economy is slowing.

China has fewer goods. They’re gonna, they’re gonna export. And if they’re not exporting, they have fewer things they’re gonna import. As well as just their own slowing economy, fewer, less internal demand. The other reality is we’ve been talking. About this reshoring trend, right? Where America, and other nations are saying, kind of, there’s a wake up call that happened during the supply chain crisis of Covid, post Covid.

People said, wait a minute. Why are we importing everything from China? We can actually make it better, cheaper, faster here in the United States. And there’s a lot of examples of this, and so pretty much every single company. That has, large American consumer base looking to reshore and move their manufacturing back to America.

Ben Fraser: Now, what one of the data points that you pointed out in our investable megatrends series that we’ve done is that the wage growth in China over the past 20 years is the fastest we’ve ever seen in human history. That it’s recorded right off, I think it’s 15 x. 

Bob Fraser: 15 x. Yeah. And that’s, that tells you where the shortage is, right?

So there’s, there you have to raise the wages. So what’s happened, this reshoring trend is actually working: over a trillion dollars was spent in 2022 last year by American companies to Reshore to America. And that’s going to be continually happening for the next 15 to 20 years. So a massive amount of investment is happening.

And that’s starting to take its toll and so one of the most shocking charts, I don’t know if you could, if you can figure out how to pull it up here while I’m Taking, is that actually the imports from Mexico have just crossed over for, I believe is the second month in a row now where the in imports to America from Mexico.

Have overtaken the imports from China. So nuts. This has been absolutely insane. What’s happening? So literally China is no longer our number one import partner, but it’s Mexico and that trend is gonna continue. And by the way, Mexico doesn’t have the same kind of labor shortage that China has, yeah, there you go.

Okay, so we check this out. So the red line is imports from China, and the blue line is imports from Mexico, and it’s just, they just reversed here. 

Ben Fraser: Yes. You can see through the past 20 years, China has been one of our biggest import relationships, right? And yeah, so Mexico’s always trend below that, but just.

This past quarter, it flip flopped and it pretty dramatically flip flopped, not just a little bit. 

Bob Fraser: And so Mexico one it’s closer obviously. So there’s no, none of these big supply chain problems. Two, Mexico has a much cheaper workforce. It’s actually cheaper to hire a Mexican laborer than a Chinese laborer into these factories.

Three Mexico has. Has an abundant labor supply. So they don’t have this demographic crisis. So if you can remember the one child policy in China, basically they have lost their young people. Their workforce is, they just don’t have a youth workforce. They, it was, 350 million forced abortions, and the ones that did survive, the ones that made it, that are primarily male, so very much male dominated.

And so there’s not enough women. And women are the ones who have children. And so they just have a major demographic crisis of their own making. So what’s happening? It’s starting to affect the economy. Meanwhile, so you’ve seen them. The trade wars are happening where more and more businesses are going to countries like India and Vietnam.

So India, of course, speaks English as a semi native language. And Vietnam is much cheaper than China. Now. They don’t have the same infrastructure. India doesn’t have the same level of manufacturing infrastructure that China has with Vietnam. But you’re seeing them competing where they can compete and taking a lot of business away from China.

And then the final piece of this is if you’ve been watching. Any of the news coming out of China for the last, let’s say year to two years. Xi the premier has really become a strong man. He has become very much like Stalin or something, just extremely heavy handed.

He’s purged anyone who doesn’t agree with him, and he’s basically taking over the country and turning it into a dictatorship. He’s, he, they’ve gone after business, so they’ve shut down a whole bunch of IPOs. The ANT groups, I p o is gonna be a big I p o. The DD group runs anti-business campaigns against various media education and other kinds of businesses.

And so what happens is all of his business confidence is just rocked. So people are, they don’t know if they can invest in business anymore because, They’ve been so attacked by the government. And so you’ve seen business confidence rocked, Chinese consumer confidence is rocked. And so that’s creating, that’s slowing internal demand.

So businesses buying stuff and consumers buying stuff is just like on, on hold. So you’re seeing, this is really, it’s honestly, it’s the beginning of the beginning. We’re gonna see China continue to have issues for the next 50 to 75 years primarily. Primarily demographically driven. It’s gonna create a huge ripple effect throughout, throughout the world.

Because China is the world’s second largest economy. And honestly, this is a don’t have don’t have the same future that we thought they had. They just don’t. Yeah. This is a 

Ben Fraser: huge deal because one, it’s not getting the same kind of coverage that some of these other things get coverage.

And so many. People that a lot of times have a vested interest or a bias that is driving their opinion on China. And China’s gonna overtake the US and our nation’s kind of on the decline. And China’s, rising over the next descendant. Yeah. Ascending.

But it’s really not the case. If you play out, it’s really difficult. I think they’re pretty much beyond the point of repairing their demographic issues. 

Bob Fraser: No, they can’t see the population. It’s set in stone. Yeah. There, if you have, x number of people of childbearing age.

That’s it. And you assume they’re gonna have 1.15, maybe they have 1.3 children per woman. You can predict exactly mathematically where their population is gonna be, with very little variability. And there’s nothing they can do. They set their future when they implemented this one child policy.

And when they rapidly urbanize, those are two things that stop the birth rate slow. The birth rate is urbanized. So it’s set in stone. This is going to happen and it’s like a, it’s like a slow motion, a catastrophe happening over the next 50 to 75 years. You’re gonna see lots and lots of negative news.

Pretty much every decade, twice a decade coming out, really negative things happening that continue to undermine China’s growth in the business world, in the economic world, worldwide. And it’s not, it’s, and it’s going to create ripples. So some of the biggest concerns I have, if you’ve been tracking the property bubble in China, which I have some, and the pro, there’s been a massive property bubble in China, both in residential, but as well as commercial kind of real estate. 

Ben Fraser: Bub would just mean price is going sky 

Bob Fraser: high. 

Price is going sky high. Okay, and if you have half, if you’re losing over the next 50 years, two thirds of your workforce, how many factories do you need? And if you’re losing half of your population over the next 50 to 75 years, how many new multifamily apartment complexes do you need?

And so what’s happening is there’s gonna be demographically driven, softening, demand. Now a lot of people think demographics put me to sleep because it’s like watching a glacier move down the hill, and you’re right but it’s the same time. Glaciers shape the valleys and shape everything about our landscape, and that’s exactly what’s happening.

So you’re going to see softness and demand. At some point you are gonna see a Chinese property bubble burst. And now can the government, the People’s Bank of China, do something? They can try, they can do things. But honestly, they’re not that, they’re not that clever.

What’s happened is Xi necessarily, when you create a one person state like this, You necessarily get rid of competence, you get rid of, the idea of, surrounding him are not people who are the brightest stars, they’re the people who are the most loyal.

And most just telling him what he wants to hear, right? Yeah. And not challenging anything because you don’t get ahead by doing that. You lose your head by doing that. So what’s happened they’re, they’ve become really incompetent in their ability to respond to anything and lead, and it’s just strong arm tactics.

So China’s in trouble. I believe they’re gonna probably have a property bubble and what that means, a collapse like that would affect the banking sector. I. They have to prop up the banking sector and it could have global implications. I don’t think, I don’t think it’s gonna affect America very much.

I don’t think so. Probably, Europe has a big trading relationship with China, so it remains to be seen how much really, what the global effect is. The other big thing that I’m thinking about is, we’ve been tracking oil for quite a while, the oil industry and.

You’re seeing oil production just steadily dropping and declining and you’re seeing it’s not being replaced because companies have not been investing. You have to reinvest billions and billions of dollars every year to continue just to maintain your oil production.

And it’s not been done for the last seven years. So we’re watching this. And then the question is, When is demand going to go above that and with China on a slow growth, we’re probably seeing more time where we’re gonna see demand continue to be soft for a while. So what’s gonna happen as soon as demand?

There is any kind of growth in demand, you’re gonna see oil prices spike. ’cause there is no additional supply to be had anywhere. So we’ll see what happens. It could be we have softer oil prices, see prices barring, global kind of, geopolitical event.

You’re gonna see probably softer oil prices, which is good news. It means we can continue to buy oil. Had very cheap prices for a while. But yeah, those are some things I’m thinking a lot about. Yeah. Awesome. 

Ben Fraser: Hopefully this was insightful and as always, we shared this a few times on this segment of our podcast, especially, I.

If you have things you’re reading or questions that you’re pondering, we a lot of times have been responsive to listeners’ emails or write-ins. You can do If you want to get our insights on some things that we may share in a broader way on the podcast, and if you are, enjoy the podcast, please help us spread the word and share this.

And it really helps us if you leave a review so that we can. I continue to get this in front of more people and share the things that we’re seeing and help people become better investors. So with that, thanks so much for tuning in and hope you listen next time.


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