Why China May Face Deflation | Top of Mind Series

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 kind of shorter topics between Bob and I where we're just discussing a recent article that we have been reading, things we've been just noticing in kind of a broader economic sense and just want to 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. So, Bob, I 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. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today.

So it, it's some really shocking news coming out of China and, um, You know, so, so China of course had these really draconian COVID lockdowns where they, they shut down entire city blocks and apartment buildings, just lock the doors and these kind of things, and I've just shut down everything. Zero COVID policy, right? And, um, and so as, so as that, that policy is ending, everyone expected, okay, Chinese economy come roaring back. Well, the Chinese economy is, is incredibly slow right now, and it's, it's in the doldrums. They just showed showed the, the economic growth that I think a 6.3%, um, you know, for China, which is well below what analysts were expecting. There's, there's all these stories coming out about youth unemployment rates. So the youth unemployment rates are, are running around 20% of people don't have— the other young people don't have jobs. And the issue is they don't want the kind of jobs that that are available in China. They don't want manufacturing jobs anymore. They want jobs that are, that are high-tech jobs. A lot of these, 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, there's a big mismatch in the workforce, uh, the available workforce from the available jobs in China. And this is, this is really a demographic problem too. So if you follow—

let's kind of pause there because that's just so fascinating because you compare and contrast that with the United States where we're at very low unemployment and we actually have pretty massive labor shortages.

Right.

China's kind of having the opposite problem. And especially in the younger employer segment, you said there's something like 20% unemployment possibly, but there's still labor shortages.

Okay. So the issue is they don't— they can't fill the manufacturing jobs. Right. They don't want the whole influx. You know, China's growth was driven by the kind of the rural workers, you know, moving to the, to the urban settings, and these, these farmers being trained in factory work, right? Well, there's not a lot of migration happening anymore, and what's happening is you're seeing the demographics of China are crazy. You know, the, the, the number of workers over the next 75 years through the end of the century, the, the number of workers in China is, is slated to decrease by two-thirds. So it means that one— China will have one-third the workers it has today. Wow. I mean, this is insane. Um, 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, you know, um, uh, you know, population is the main driver of GDP. So if you have you know, a billion people and, you know, their productivity per person is, is, is X, then you have a billion X GDP. Um, so if you cut that people, those number of people by half, your GDP drops by half. So this is their economy drops by half. So this is the big, big, big picture we're seeing. So they have these, this problem where they have these jobs available, actually is a worker shortage, but they don't have the, they don't have the, the right kind of workers to go fill those, those jobs. And so, so we're seeing a pretty big, big mismatch coming, coming there. Slowing growth, higher youth unemployment, and that youth unemployment is a problem. You get a lot of disaffected, you know, angry young people. You know, could we see a Tiananmen Square kind of thing again? Furthermore, you're seeing— so China's imports and exports dropped by double digits. What I mean, imports and exports dropped by double digits. So you're seeing their, their exports dropping. What's going on with that? What's going on with that? Well, there's a couple of things. There's a couple of things. One is the global growth impulse is slow, right? As the, as the global economy is slowing, China has fewer, fewer goods they're going to, they're going to export. And if they're not exporting, they have fewer things they're going to 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, you know, and other nations are saying, you know, the kind of— there's a wake-up call 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, there's a lot of examples of this, you know. And so pretty much every single company that has, you know, large American consumer base is looking to reshore and move their manufacturing back to America.

Now, one of the data points that you point out in our Investable Megatrends series that we've done, um, is that the wage growth in China over the past 20 years is the fastest we've ever seen in human history, at least recorded, right, of I think it's 15x.

15x.

Yeah.

And, and that's, that tells you where the shortage is, right? So there's, there you have to raise, raise the, raise wages. So what's happened, this reshoring trend is actually working. Over $1 trillion 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 happening. Well, 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, I'm yacking— is that actually the imports from Mexico have just crossed over for, I believe, is the second month in a row now where the imports to America from Mexico have overtaken the imports from China. So nuts. I mean, this has been absolutely insane, you know, what's happening. So literally, China is no longer our number one import partner, but it's Mexico. And that trend is going to continue. And by the way, Mexico doesn't have the same kind of labor shortage that China has. So, 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've just reversed here.

Yes, you can see for the past really 20 years, I mean, China has been one of our biggest, you know, import relationships, our number one, right? And yeah, so Mexico's always kind of trying to blow that. But just this past quarter, it flip-flopped and pretty dramatically flip-flopped, not just a little bit.

Right. And so Mexico, one, it's, it's closer, obviously. So we— there's, 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 it is a Chinese laborer, um, into these factories. Um, three, Mexico has, has an abundant labor supply, so they don't have this this demographic crisis. So if you remember the one-child policy in China, I mean, basically they have lost their young people. Their, their workforce is— they just don't have a youth workforce. They— it was, you know, 350 million forced abortions, you know. And, and the ones that did survive, the ones that made it, 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, so they just, they have a major demographic crisis of their own making. So what's happening, it's starting to, to affect the economy. Meanwhile, I mean, so you've seen the, the, um, the, uh, trade wars happening where more and more business is going to, to, uh, to countries like India and Vietnam. So India, of course, you know, speaks English as a English as a, as a semi-native language, um, and Vietnam is, is much cheaper than China. Now, they don't have the same infrastructure, you know, India doesn't have the same level of manufacturing infrastructure that China has, and neither does Vietnam. So, but you're seeing them competing where they can compete and taking a lot of business away from China. And then the, the final piece of this is, if you've been watching any of the, any of the news coming out of, of China for the last, you know, let's say a year to 2 years, Xi the premier has really become the strongman. I mean, he has become very much like a 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. Well, he's— he— they've gone after business So they've, they've shut down a whole bunch of IPOs. The Ant Group's IPO was going to be a big IPO. The Didi Group, they've, they've, they've run anti-business campaigns against various media, education, and other kinds of businesses. And so what happens is all of this 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, by the government. And so, so you see 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, so you're seeing this is really— it's honestly, it's the beginning of the beginning. We're going to see China continue to have issues for the next 50 to 75 years, primarily primarily demographically driven. Um, but, you know, it's going to create a huge ripple effect throughout, throughout the world because China is the world's second largest economy. And I honestly don't have— don't, don't have the same future that we thought they had. They just don't.

Yeah, this is a huge deal because, one, it's not getting the same kind of coverage that some of the other things get coverage, right? And so many people that a lot of times have a vested interest or a bias that is driving their opinion on China, right? And China's going to overtake the U.S. and, you know, the— our nation is kind of on the decline and China's, you know, rising over the next— yeah, kind of ascending. But it's really not the case. I mean, if you play out, it's really diff— I mean, I think they're pretty much beyond the point of repairing their demographic issues. I mean, they're, they're, uh, no, they can't see the population.

It's, it's, it's set in stone there. If you have, you know, X number of people of, of, of childbearing age, that's it, you know. And you, you assume they're going to have 1.15, maybe they have 1.3 children per, per woman. You, you can predict exactly mathematically where their population is going to be, you know, with very little variability. And there's this nothing they can do. They, they put their, they they set their future when they implemented this one-child policy, you know, and when they rapidly urbanized. Those are, those are two things that stop the birth rate, slow the birth rate, is they, they urbanize. So, so it's, it's set in stone. This is going to happen. And it's, it's like a, it's like a slow-motion catastrophe happening over the next 50 to 75 years. You're going to 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. Um, and it's, and it's not, it's, it's going to create ripples. So some of the, some of the biggest concerns I have, you know, if you've been tracking the property bubble in China, which I, 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.

And bubble just meaning prices going, going sky high.

Prices going sky high. Well, okay, if you have half— if you, if you're losing over the next 50 years two-thirds of your workforce, how many factories do you need, right? And if you're losing half of your population over the next 50 to 75 years, how many, how many new multifamily apartment complexes do you need? And so what's happening is there's, there's going to be demographically driven softening demand. Now, a lot of people think demographics, you know, it's like put me to sleep because it's like watching a glacier move down the hill, you know, and you're right. But, but at 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 in demand at some point. You are going to see a Chinese property bubble burst. And, you know, now can the, can the government, the People's Bank of China, you know, do something? Well, they, they can try, they can do, do things, um, but honestly, they're not that, they're not that clever. You know, what's happened is Xi necessarily, when you, when you create a one-person state like this, you necessarily get rid of competence, right? You, you get rid of, you know, you know, the idea of, you know, surrounding him are not people who are the brightest stars, they're the people who are the most loyal. Right, and the most, um, you know, you know, um, you know, 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, right? So what's happened, they become really incompetent in their ability to respond to anything and lead, and it's just, it's just strong-arm tactics. So China's in trouble. I, I believe they're gonna probably have a property bubble. And what that means, a collapse like that would affect the banking sector where they have to prop up the banking sector, and it could have global implications. I don't think, I don't think it's going to affect America very much. I don't think probably, you know, Europe, Europe has a big trading relationship with, with China, you know, so it remains to be seen, you know, how much really what the global effect is, you know. The other, the other big thing that I'm thinking about is, you know, we've been tracking oil for quite a while, the oil industry, and, and you're seeing oil, oil production just, just steadily dropping and declining. And, and you're, and you're seeing, and it's not being replaced because, 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 7 years. So we're watching this. And then the question is, when is demand going, going to, going to go above that? And, and with China on a slow growth, we're seeing probably more time where, where we're going to see demand continue to be soft for a while. So what's going to happen as soon as demand, demand, there is any kind of growth in demand, you're going to see oil prices spike because there is no additional supply to be had anywhere. Right. So we'll see what happens. It could be we have softer oil prices, see prices barring, you know, kind of global, global kind of, you know, geopolitical event. You're going to see probably softer oil prices, which is good news. It means we can continue to buy, buy oil. Oil, you know, production had very cheap, cheap prices for a while. But yeah, those are some of the things I'm thinking a lot about. Yeah.

Awesome. Well, hopefully this was insightful. And as always, you know, we share this a few times on this segment of our podcast, especially 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 that at thebillionairepodcast.com 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 enjoying the podcast, you know, please help us spread the word and share this. And it really helps us if you leave a review so that we can 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.