China dominates global manufacturing while facing population collapse. Can Beijing’s rush to automation save an economy where factories operate without humans?
As factories across China operate in darkness — not because they’ve failed but because they’re so automated they need no human presence — a profound contradiction emerges: a nation that produces one-third of the world’s goods while consuming only 12 percent of them, simultaneously dominating global manufacturing while its aging population hurtles toward catastrophic decline.
According to UN estimates, China’s population could literally halve by the end of this century, creating a society where retirees will soon outnumber workers.
In this WhoWhatWhy podcast, China expert Dinny McMahon explains how Beijing is desperately racing to innovate its way out of demographic disaster — replacing construction-led growth with advanced manufacturing and automation. But as the collapsing property market exposes mountains of municipal debt, and rising global trade barriers threaten China’s export-driven strategy, the sustainability of this economic pivot hangs in the balance.
McMahon, who spent years as a financial journalist in Beijing, takes listeners inside China’s digital payment revolution, explains the true reliability of official economic statistics, and reveals how China’s underfunded social safety net is already straining under demographic pressure.
For those of us seeking to understand our most formidable economic competitor — a nation more vulnerable and more formidable than most Americans imagine — this conversation offers essential insights that cut through both Western hubris and paranoia about China’s economic future.
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(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)
[00:00:00] Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. In the emerging days of spring 2025, as American manufacturing hubs reel from a trade war escalating beyond anything we’ve seen in modern history, the most urgent question may not be whether 145 percent U.S. tariffs on Chinese goods are sustainable. They’re clearly not, as Treasury Secretary Scott Besson himself acknowledged just a few days ago. No, the more profound question is whether we understand the true nature of our adversary at all. For decades, Western observers have oscillated between fear of China’s unstoppable rise and dismissal of its fundamental weaknesses. Today, as factories across the Chinese landscape operate in darkness, not because they fail, but because they’re so automated they need no human presence. We face a competitor that simultaneously struggles with a collapsing property market, mountains of municipal debt, and yet dominates global manufacturing of everything from solar panels to next generation electric vehicles. What is really behind these contradictions? What happens when a nation that produces one third of the world’s goods consumes barely 12 percent of them? And what should we make of the Chinese political elite’s conviction that they can innovate their way out of the middle income trap that has snared so many developing nations before them? Few people are better positioned to navigate these questions than my guest today, Dinny McMahon. He has spent over a decade as a financial journalist deep inside China, including six years with the Wall Street Journal in Beijing. His groundbreaking 2018 book, China’s Great Wall of Debt, warned of structural weaknesses in the Chinese economy that have since manifested themselves in spectacular fashion. Yet China’s technological capabilities, including its race forward with AI, have simultaneously grown more advanced. Dinny McMahon leads China markets research at Trivium, where his team systematically monitors the Chinese policy environment, parsing hundreds of sources daily to detect the subtle shifts that precede major changes. His work involves tracking not just what Beijing says, but what provincial officials actually do, revealing the gap between national declarations and local implementation. At this moment, when misunderstanding China could lead to catastrophic policy errors, McMahon’s carefully calibrated perspective cuts through both Western hubris and paranoia to reveal a China more vulnerable and more formidable than most Americans imagine. Dinny McMahon, welcome back to the WhoWhatWhy podcast. Hello, Jeff. It’s great to be talking to you again. Well, it is a delight to have you here. Thank you so very much. 10 years ago, we looked at China and we saw this economic miracle that was happening. And then something else happened in China. There seemed to be a focus on repression. The country seemed to take its eye off the economy and was more concerned about the internal aspects of China. We saw technology companies that were broken up or held back, people like Jack Ma that were kind of frozen out. And yet now there seems to be a real focus on the economic aspects of China. Talk a little bit about that. What has been transpiring where we are now? Well, I think the single biggest change we’ve seen in recent
[00:03:27] Dinny McMahon: years was really the collapse of China’s housing market. I mean, more than anything, that is what drove China’s miracle economy for 20 years. It was as recently as the late 90s that people were living in state-provided housing. The quality of accommodation was awful. And so you kind of had 20 years of China just needing to build new accommodation. And then you lay it on top of that sort of China’s industrialization, people moving from the countryside to the cities and hundreds of millions. And so you had this sort of never-ending demand for more and more housing and supporting that more and more infrastructure. But the problem these days is that China’s working age population peaked in size in 2012. Its overall size of its population started shrinking in 2023. And so there’s no longer that demand for the economy to build more housing and more infrastructure each year than it did the year before. And so this sort of machine, this sort of debt-fueled machine of investment in construction was always going to break and go into reverse at some point. And that year was 2021. It was kind of brought on by the government a little bit when it started choking off credit to the property developers. But housing demand peaked in 2021 and it’s been falling ever since. And so that was the driver of the miracle for over two decades. And so something else had to replace it. And all this sort of the emergence of China, not just as sort of the global manufacturing behemoth, which it’s been for a long time, but this increasingly, this nation that produces increasingly sophisticated and innovative manufacturers, that really has emerged pretty much since the peak of the housing market, with the government pushing more and more credit, more and more financial resources into advanced manufacturing with the view or the aim of replacing construction they grossed with this innovation, productivity, advanced manufacturing-led growth. And that’s really
[00:05:37] Jeff Schechtman: what we’ve been seeing over the last few years. Talk about the advanced part of advanced manufacturing and how China has been so successful in leapfrogging everyone else in so many areas of
[00:05:50] Dinny McMahon: manufacturing. Well, one of the ways they’ve done it is by focusing a lot on innovation. And this is something that’s always been part, or the Communist Party has always been about innovation as much for sort of national security reasons as anything. And that sort of rhetoric goes back decades, but it hasn’t always been in a position to do it. But that’s very much changed over the last 10 years when they’ve really put a lot of resources at a state level, you know, the universities, private sector, it’s something that they’ve sort of really, really encouraged. And so on one hand, you’ve got the innovation, but the sort of innovation they’re encouraging as well is also the innovation in terms of the actual manufacturing process. And so another thing that Beijing has been aware of for years is that ultimately, given the one-child policy, at some point its population was going to start shrinking and aging aggressively, and they wouldn’t be able to undo it. And, you know, that’s kind of already starting. So they always had in mind that at one point to sort of maintain their prowess and their edge in manufacturing, they wouldn’t be able to rely on sort of an endless supply of cheap workers. And so they have moved aggressively towards replacing factories staffed with hundreds, thousands of individuals with automation. And you kind of spoke, you alluded to this in your opening comments. This is something they’ve been moving towards aggressively in recent years. You have factories, which are entirely dark because there aren’t people in there. And that is something that the government’s been supporting with policies, with carrots and sticks and subsidies. And by developing the country, the companies that can actually build these machines in the first place, there’s been a sort of a full court press towards forcing companies, manufacturers across the board into upgrading their machinery. And I say across the board, because often when we think about this, we think about electric vehicles or we think about robots. But China wants to do this even with their kind of their low end manufactured goods as well. So for example, you see this with the cigarette lighter industry, which China has dominated for decades. But traditionally, it was a sort of industry where you’d have, you know, hundreds, maybe thousands of people working with tiny little components and tiny, you know, tiny tools. But the government has pushed those firms to move into, you know, removing the people, replacing them with, you know, sensors and automation. Ultimately, they want to replace it with AI as well. And the firms themselves have been happy to do it because it’s been increasingly hard to find people to put into those jobs, either because they don’t want those sorts of jobs anymore, or because, you know, the labor force kind of peaked a few years ago, and it’s just difficult to find the warm bodies to throw at that sort of labor intensive working.
[00:08:55] Jeff Schechtman: The other aspect about the labor force is the way demographics have changed, the way in which so much of the population is aging out. Talk about the impact of that.
[00:09:05] Dinny McMahon: This is going to be something that shapes China’s economy for decades to come in really ways that we can’t quite anticipate at the moment. So as I said, China’s population peaked in size in 2023, but the size of its workforce has been shrinking for over a decade now. Now, demographers can estimate to a fair degree of certainty what future populations are going to look like because they can make certain assumptions about the birth rate and extrapolate from there. And they’ve got a fair sense of the pace at which people, you know, the longevity of the average person and how old they’re going to be when they pass. So according to UN estimates, China’s population could halve in size by the end of this decade, which is absolutely mind-blowing. Now, not only will it halve in size, but I think by about 2070, maybe 2080, the size of the retired population will be bigger than the size of the working age population. The working age population is going to be, but the financial burden on them is going to be absolutely huge because they’re going to need to support more people who’ve retired in retirement than are working plus whatever children, you know, that they have as well. So, you know, we’ve never really seen this sort of decline in population really in peacetime before. I mean, this is far more aggressive than even what the Japanese are going through. So of course, the questions are, what does this mean for both society and for the economy? So of course, on one hand, the Chinese will buy less. I mean, there’ll just be fewer people to, you know, to supporting domestic demand. And so, you know, China as a nation will be buying less stuff. Now, in addition to that, that would probably then mean that a lot of the factories that exist in China today, there’ll be less need for them. You know, you take a lot of the infrastructure, whether it be, you know, schools or, you know, kindergartens or even the roads, there’ll be, you know, less need for them as well. But all those things are kind of way down, we’re talking decades away before those sorts of implications really start biting. But it’s certainly something that the authorities are kind of already got one eye on because it’s that sort of stuff is almost absolutely unavoidable. And I think it’s one of the reasons why they’re moving so aggressively into advanced manufacturing and automation, because they want to kind of try and build China into an advanced economy as fast as it can and build up its automation capacity so that, you know, with automation, ultimately, they can replace people, which are going to be an increasingly rare commodity with robots. And secondly, they want to be able to build China into an advanced economy now so that, you know, while the population isn’t really shrinking, particularly aggressively, it can build up incomes and it can expand its tax base so it can spend more on welfare, ultimately get China’s economy into a place where it’s far more wealthy than it is today, such that it can better support or better deal with those financial stresses that will come as the population shrinks. Now, I’d make one last comment as well is, as I said, everything I said then is stuff that’s coming down the turnpike in, you know, in a few decades’ time. And Beijing’s going to try and do whatever it can to mitigate the fallout. But I think we’re also starting to see some of the implications of a rapidly aging population already. One thing that has kind of surprised everybody is that since the pandemic, since the end of COVID-19, Chinese domestic spending, household consumption, hasn’t really bounced back to what it was prior to the pandemic. And there seems to be a few reasons for that. One of those is, of course, the property market. You know, housing prices are down well below where they used to, and so it’s affecting, you know, the middle classes, you know, personal wealth, and so they’re less willing to spend. But another thing that seems to be going on is that pretty much anybody my age, anyone really in their 40s at the moment, that first generation of people who were the first wave of the one child generation, they’re seeing their parents kind of hit their 70s and their mid 70s. And anecdotally, and you read this online in sort of Chinese, you know, bulletin boards and chat rooms and conversations, is that all of a sudden, the cost, that those parents who only had one children, they’re starting to see their medical bills rise. Of course, in China, the medical system is underfunded by the government. The amount of out-of-pocket expenses is really quite significant, and it goes up certainly for the elderly as well. And so, you know, a lot of people who don’t have any siblings and may have married somebody who didn’t have any siblings, and so you’ve got couples who are now taking care of four retired parents who are now of an age where their medical bills are going up. Anecdotally, that seems to be something that is really starting to weigh on people’s spending because, you know, the personal cost to them of taking care of their parents either has gone up or they can see the risk that it’s about to go up very, very soon. And anecdotally, just a few years ago, we started to see the provincial governments start to give people who don’t have any siblings extra vacation days every year, between something 10 and 15 days a year, in order for them to be able to take care of their parents because there’s a real understanding at this point that the system isn’t sufficiently equipped or set up for a nation or people without siblings to take care of their parents as they reach an age where they need the additional help and their health starts to struggle.
[00:14:54] Jeff Schechtman: And talk about what exists in terms of the social safety net in China, because it’s always been relatively small, and now with the economic pressure, it’s potentially smaller.
[00:15:06] Dinny McMahon: This is an interesting one because it is underfunded on all sorts of levels. The pension system is underfunded, and it’s likely to run out of money, I think, by 2035. That’s the state provided pension system. The healthcare system, out-of-pocket expenses, it’s typically about, I think, $0.33 on the dollar for people, and it goes up to about 50% for people over 65. There are real expenses, and the welfare system isn’t universal either, which is something that surprises a lot of people, given that China is a communist country. If you were born in a city or official residency in a city in China, then you have access to the pretty decent provision of public services. Your kids don’t have any trouble going to the public schools. Sure, the healthcare system is underfunded, but at least you’ve got access to it. You’ve got access to urban levels. If you retire, you get an urban pension, which is higher than a rural pension. But the problem is for China’s 300 million migrant workers. These are people who’ve left villages, small townships in the countryside, and they’ve moved to China’s cities. These people are the engine of China’s construction boom. They are the engine of China’s export boom. They’re the people who staff the factories, and yet they don’t have the same equal access to public services as their neighbors in the city, because they were born elsewhere, because their residency permit says they’re not from the cities. There’s not as many positions available for their kids to attend the public schools. If they want a pension, then they have to go back to rural areas to get it. They aren’t as able to access the urban healthcare system. Everything is really stacked against them. In one way, this is great for the local governments, because you have all the millions of people who’ve flowed in, and they’re a cheap workforce, which has helped boost economic growth, but the local governments don’t have to pay for their welfare. They’ve realized all the economic benefits at a fraction of the cost. But China is now in a position where the economy is so dependent on exports, because post this housing boom, with this focus on manufacturing, by definition, this move into more high-end manufacturing, China can’t absorb all the additional manufactured goods by itself. It really is an export-led strategy. But given the way the world is going with rising trade barriers, not just the US imposing tariffs as well, but certainly the EU has become far more hostile to Chinese exports in recent years as well. Given this sort of souring global position on free trade, or at least the existing free trade regime, China knows on one level that it can’t depend on exports in the way that it would ideally like to. So it really needs to boost domestic demand. One of the easiest ways to do that would be to even out the provision of public services, so it became a little bit more universal. And yet it’s proven incredibly
[00:18:48] Jeff Schechtman: reluctant to do that. How sustainable is the current situation where China is producing so much product that it represents a third of the world’s manufacturing, but only consumes 11-12%
[00:19:02] Dinny McMahon: of that? Jeff, that is the question that really goes to the heart of, you know, what we can expect of China in the coming five years or even decades. Because on one level, it is mind-blowing to think that China is responsible for so much global manufacturing already. It’s mind-blowing to think that we haven’t got to this. And yet at the very heart of China’s economic strategy is that it will increase supply. And certainly you see the way that it is lending and investing in factories and innovation and manufactured goods. The assumption is it will produce more and it will be able to export more. And I think whether it can or not is the question of today. Now, of course, now with the US tariffs, China’s goals are going to become far more difficult. But there are going to be ways that it does continue to pursue an aggressive export agenda. China is very enthusiastic about free trade agreements, whether they’re bilateral or in a multilateral setting. It’s been pursuing them aggressively for years and it’s always looking for new ones. Also, what you’re going to see is far more Chinese companies go abroad and set up factories. Now, the great thing about factories, building factories abroad, is that they help you get around local trade barriers. So, you know, based on whatever the local country’s rules are, you build up a factory, you have to produce some of the manufactured goods locally, but the rest of it you’ll still be able to import from China. So I think you’re going to see, you’re seeing it already, that pace is going to accelerate. You’re going to see far more Chinese factories move abroad so that at least they’re still importing some stuff from China into those new overseas factories. You are also going to see China really double down on the global South, developing economies, or beyond that, actually, pretty much any country that doesn’t have an advanced manufacturing sector. And, you know, the reason for this is because, you know, as the barriers go up in the US and EU and, you know, perhaps even, you know, the Japanese are certainly wary of being too exposed to Chinese supply chains. China has to find somewhere else to export their goods. And the thing is, Chinese advanced manufacturers, particularly consumer goods, are welcome in the rest of the world, the world outside of China in the EU, to a degree that I don’t think most Americans necessarily understand. I was just back in Australia for a holiday a couple of weeks ago, and it is mind-blowing the degree to which you see Chinese brand cars on the road. And that would be unthinkable in the United States because you don’t see Chinese vehicles anywhere. But in Australia, they are ubiquitous. And they are, you know, similar, it’s a similar situation in pretty much any country that doesn’t have its own car industry, and particularly the developing world, because Chinese cars are cheap, they’re well-made, they’re well-designed. And when it comes to electric vehicles, they’re quite innovative as well. So I think you’ll see a doubling down on the rest of the world for China. And that will result in China, Chinese firms sort of eating into the market share of American firms and European firms and Japanese firms in these parts of the world. The other thing, which I don’t think is fully understood either, is that part of China’s export strategy in recent years, it’s not all about finished goods. So yeah, China exports a huge amount of stuff directly to the United States. The US is China’s biggest export destination. But that headline figure barely covers the full extent of the amount of Chinese-made stuff that actually ends up in the United States. Most of the growth in Chinese manufacturing, and particularly their high-end manufacturing, isn’t of finished goods like cars or dishwashers. They’re of what China called, what were called intermediate goods or their components. So they’re the bits and pieces that then get sent to Vietnam or Mexico, or pretty much even directly to the United States, and then get put together with other components and goods to create that final thing. And I don’t have the numbers in front of me, but the amount of stuff that China, the sort of components that China produces that eventually ends up in the United States, in terms of value, it’s far greater than kind of the amount of stuff that gets exported directly to the US. So by focusing on that side of the equation, it’s far difficult for the US or for any country for that matter to extricate China from its supply chains, because it’s making parts that no one else is in a lot of cases, that are just so essential to the manufacturer of finished goods. So I think all of those things are to keep in mind. Yes, it is going to be increasingly difficult for China to find countries or anyone to kind of buy its manufactured goods in increasing volumes. But China has a strategy and it has an approach which will kind of allow it to keep pushing the envelope. And there’s one more thing I should mention as well. The other thing it will do is cut prices. And we’ve seen that over the last few years as well, that the price of Chinese exports, depending on the good, keeps going down. And that’s creating problems for China back at home as well. But it is kind of the last measure you can pursue to ensure that kind of you can find
[00:24:36] Jeff Schechtman: somebody overseas to buy you. Is there an argument to be made that the current battle over tariffs could have a positive impact on China? They may not be able to import as much into the US, but it drives them closer to other countries in the world in terms of imports, whether it’s Russia, whether it’s Brazil, whether it’s the global South or even the EU. It’s a good observation,
[00:25:00] Dinny McMahon: Jeff. I think given the choice, I think China would always prefer to be able to export freely to the United States because the US is the global consumer of last resort. It buys more than anybody else. If you had to replace the United States wholesale, it’s almost impossible to do it. However, Chinese exports will become an increasingly ubiquitous part of the economies of a lot of developing countries. As I said, Chinese firms will eat into the market share of European and Japanese and US firms. And so I think what you’ll probably find is, I think US companies, for example, one of the reasons, one of the ways the US has kind of expresses or has been able to cultivate soft power around the world is through its brands, through Coca-Cola and through things like Ford and GM. I know in Australia, traditionally, our big stock car races have been in between GM and Ford. People are very, very passionate about whether they were Ford buyers or GM buyers, and people really have close personal relationships with their vehicles. And I think that’s often been the case with some US products. I mean, Coca-Cola is certainly one of them. And the question is, now might you actually find China is in a position to kind of take some of that away? Because as I said, a lot of what it is producing, particularly in terms of cars, they are cheap and they’re well-designed, and they’re eating into market share. And Beijing’s vision isn’t that it just stops with cards and the electric batteries and solar components and these sorts of things have been the big three exports in sort of high value finished goods that they’ve really had been successful in the last few years. But they have a vision of more rapidly expanding into other goods as well. And so it is a question, if China can start to move into commercialize other innovative products, like flying cars is something that’s high on their agenda and sort of drones, more common use of drones for transportation purposes. If it can really manage to commercialize this sort of stuff and then export it to developing countries and places around the world, might it be able to sort of develop a certain soft power just because people start to see Chinese made goods as something that is sort of welcome into their lives, welcome to their households, something that they feel a personal relationship with. Certainly it is conceivable and it will come at the expense of the advanced economy.
[00:27:53] Jeff Schechtman: Talk about all of this in China’s relationship to the dollar, to global currencies, and how that’s playing out now, particularly given China’s ongoing debt crisis.
[00:28:05] Dinny McMahon: China has been aware for quite some time that its dependence on the dollar is potentially a strategic risk, strategic vulnerability. Beijing has been trying to push what it calls the internationalization of the renminbi or the yuan since about 2009, but it really hasn’t made strides towards it at all. That’s largely because it’s not a freely traded currency. There’s all sorts of restrictions on your ability to convert the renminbi into other currency. Now, there’s certainly been a degree of liberalization that’s been going on gradually since 2009, but at the end of the day, it is not a free currency in the way that we understand the dollar or the euro or even the yen to be. But at the same time, Beijing needs it to be in a position where the thing it ultimately worries about is that the U.S. will do to China what it did to Russia after Russia invaded Ukraine. That was effectively saying that Russia could no longer use the dollar for truly any purpose at all, most importantly, to settle its trade. If Russia wanted to sell something abroad, it couldn’t get paid in dollars. If it wanted to buy something from overseas, it couldn’t pay for it in dollars. And China’s fear is always that it’d be in this sort of position. Now, I think Beijing is now at a point where it realizes that in the current global currency regime, it will never be in a position where it can internationalize the renminbi to a degree to which people the world over are willing to freely transact in renminbi in the way that they currently use the dollar or to a lesser extent, the euro. It’s never going to get to that degree. So instead, what it seems to be working towards is it is encouraging trading partners to use the renminbi for imports and exports of Chinese goods whenever possible. It’s encouraging, it’s setting up the hard infrastructure for the cross-border transfer and exchange of renminbi in countries around the world. It is ensuring that there is a ready supply of renminbi in key trading partners through swap agreements. It is working towards encouraging Chinese firms to invest in renminbi in other countries. There’s a whole lot of mechanisms of kind of, you know, it’s moving towards putting in place an infrastructure which allows the renminbi to be used more readily, even if it isn’t being used in sort of freely to the same degree of the dollar. And I think ultimately the point of all this activity is if the day comes that the U.S. turns and says, China, you can’t use the dollar anymore, then China has done everything in its power to kind of put the infrastructure in place that will mean that it’s not caught flat-footed, that it can start trying to move its trading partners over into using the renminbi in the way that the Russians weren’t able to do with their trade partners with the ruble. So it’s trying to set things up as well as possible so it has set up a degree of insulation, you know, if things go horribly wrong. But it realizes it will never get to a point whereby people freely embrace the renminbi as, you know, as an alternative to the dollar in the current
[00:31:31] Jeff Schechtman: sort of global currency environment. Because China has been so aggressive and so advanced in digital payment systems. Talk about the impact that that has had on all of this.
[00:31:42] Dinny McMahon: When it comes to digital payment systems, I think it has less to do with the value of the renminbi globally and it has a lot more to do with the convenience of just everyday life in China. You know, China, for the most part, in terms of technologies, it leapfrogged credit cards. Whereas in the U.S., in a most advanced economy, the main form of transaction these days for ordinary people is by using their credit card. Whether that be in person at a store or whether it be online, the credit card has really become the dominant form of transacting. And of course, we have things like, you know, Venmo and PayPal and they kind of supplement our ecosystem of electronic payments. But card-based payments issued by banks are still the dominant form of transaction. Now, China really leapfrogged all this and you have payment systems set up by the two big tech giants, Alibaba and Tencent, with their own online payment systems. And so these days in China, everyone really pays by using their phone and by scanning QR codes. People transfer cash between friends using the app. They pay for restaurants and at shops using the app. They pay, you know, somebody begging or, you know, sort of a busker using an app. The whole thing, if you’re a foreigner turning up in China, you almost feel excluded from the economy because of your unfamiliarity with the payment system. Almost nobody uses cash anymore. You know, credit cards aren’t particularly easy to use either. If you don’t have one or both of these, you know, two major payment systems run by the two big tech giants, then you’re really locked out of the economy. But within the economy, it has made people’s lives incredibly more efficient and easy to manage their everyday payments and their finance. So it really is, in some ways, when you look back at it, it really was one of those early signs that China was innovating rapidly and successfully and in ways that we never really anticipated in Western countries. And sort of the pace and the success of innovations have really sort of accelerated since then. But certainly the payment system was one of the early ones where people sort of sat up and went, wow, China is really doing something special and smart and highly successful that the West hasn’t been able to do.
[00:34:29] Jeff Schechtman: When we see the numbers that come out of China with respect to its economy, with respect to GDP, with respect to growth, how accurate are those numbers? How aware are we of what’s really transpiring within the Chinese economy? The growth numbers have never been
[00:34:48] Dinny McMahon: particularly reliable. And the way we know, as much as anything, is that from month to month, the GDP figure barely moves. It goes down a little. It goes up a little bit. But the reality is that economies are far more volatile. They bounce around a lot more. And yet the Chinese numbers are always smoothed out a little bit. So the degree to which just how strongly China is growing at any point in time, it’s really hard to say with any right certainty. And you know, now sort of more than, you know, and then of course, if data becomes politically sensitive as well, there’s been a very long tradition of paging, stepping in and either stopping the publication of that data point entirely or redefining it. And we saw that, I think it was last year with the youth unemployment data. Youth unemployment data got up to, I think, about 24% early in 2024, which was, you know, the whole world was looking at it. It was clearly a sign that something was wrong in the Chinese economy. The authorities were quite concerned about it and weren’t entirely sure what to do about it. And so they stopped publishing it for a few months. And when they started publishing it again, they had redefined, they changed the equation. They redefined what youth unemployment was. And that’s kind of, and the new numbers were significantly lower. So whereas, you know, under the previous calculation, I think youth unemployment got up to 24% and the new number is now at about 16%. But still, I mean, that was, you know, something that everybody could live with. So I think that’s kind of representative of Chinese data. You know, it is as much as anything an exercise. A lot of the data is an exercise in messaging. It, you know, it is ultimately, particularly the high profile data sets are about, you know, the government putting its best foot forward and telling the story. Now, of course, some of the data that is a little bit more granular or isn’t as high profile is a lot more reliable. And you can kind of get a good sense of what’s going on in the economy from some of those data sets. But certainly the ones that get the most attention, the most high profile data like things like, you know, unemployment recently and GDP aren’t that reliable. And there’s not
[00:37:12] Jeff Schechtman: necessarily that much we can take away from it. To the extent that the US is in this competitive relationship with China, what is the aspect of China at this point that is the most vulnerable in terms of its economy, in terms of its demographics? Where is it weakest at this point?
[00:37:30] Dinny McMahon: That is a tricky question. I would say that its weakest point is also its strongest point and that is its exports. With the end of this sort of debt led housing model, they need an alternative. And the alternative that the authorities have settled on is this, you know, aggressive move into manufacturing. And there’s a real rationale behind this because the idea is that this is about lifting productivity. You know, the move into manufacturing isn’t the old days of, you know, low wages and, you know, large factories. What it is, is there’ll be fewer people on the factory floor, but they will be paid higher wages because they’re going to be more technically advanced jobs. And so this is a way to raise incomes. And by, you know, pursuing automation and innovation, firms will be able to cut, you know, cut costs and raise prices and will be able to generate higher profits. And with higher profits, they’ll be able to spend more on engineers and research and development. They’ll be able to spend more on brand development and marketing. You know, they’ll spend more on finance and things like, you know, M&A and government relations. You create an entire, you know, new waves of white collar jobs that under the previous economic structure, you know, the firms didn’t really have, weren’t really paying for. And so it’s a vision of like, through this, you know, forced march into advanced manufacturing and innovative manufacturing, you’ll be able to transform the shape of the economy into higher paying jobs and a larger tax base for more profitable companies. And then the government will have the money to pay more on welfare. And that’s this sort of grand vision. But none of it really works if the world can’t absorb enough of these new manufactured goods. And it doesn’t really work if China can only push those manufactured goods on the rest of the world by cutting prices. Because if these firms are operating on wafer thin margins, then a lot of what I just described, higher wages, higher bonuses, higher profits for companies translating into a greater tax base for the government, none of that materializes. And so that is in some ways China’s greatest vulnerability at the moment. It’s putting its eggs on its vision of its development, being able to deal with a growing, you know, an aging population and its efforts to sort of leave the middle income trap and become an advanced economy. It all comes down to this sort of export led move into manufacturing. And you know, if sales don’t hold up, then the whole kind of edifice kind of comes crumbling down. Now it’s not as much as anything, that’s the vulnerability. And we’re seeing that play out already. So on one hand at the moment, the Chinese economy looks incredibly robust. Exports have been growing aggressively since probably the middle of last year. You know, as I was saying before, the world is embracing its electric vehicles. There is a real sense that China is innovating and becoming a more technically advanced country. But that’s kind of what we see from the outside. Domestically in China, Chinese firms have been struggling with deflation for over two years. I mean, every month, the producer price index, which is the measure of price inflation or deflation for firms. So the price at which firms are buying and selling things from each other has been contracting. It’s been depletionary. Consumer prices have effectively been slapped, barely moved at all, marginally inflationary if that. But for firms themselves, the price at which they sell stuff to each other has been falling every month for over two years. And the reason that’s been the case is twofold. One is because of over capacity that’s been left over from the property crisis. So, you know, China will never again build as much housing or infrastructure as it did in 2020 and 2021, which means that its steel factories are capable of making more steel than the economy will ever need again. It’s capable of producing more cement than it will ever need again. Probably the same goes for aluminum and glass, even for white goods as well. I mean, traditionally people’s purchase of dishwashers and air conditioners and TVs, it was linked to their purchase of a new house. Now, as the housing sales have collapsed and will never get back to their previous levels, China is probably capable of making far more dishwashers than it will ever need again. So you’ve got that problem of overcapacity. And so these firms are desperate to sell what they can by cutting prices. But you also have an overcapacity issue in the sort of sunrise industry, in the electric vehicles, you know, in solar components and battery makers and pretty much, you know, all these other sort of startup industries that China’s enthusiastic to sort of develop. And the reason is that’s kind of China’s development model. You know, you have a huge amount of state support for a whole lot of firms, which then kind of compete against each other. And you end up with an excess of capacity and they drive prices down and then they go overseas to be able to try and stay alive because they can charge more overseas than they can domestically. But you still have that same dynamic of prices being pushed lower in a desperate attempt for firms to stay alive. And so that’s kind of where we are in China at the moment. The vulnerability is in the industrial and the manufacturing sector. And then vulnerability is sort of playing out at the moment in falling prices and sort of wafer thin problems.
[00:43:14] Jeff Schechtman: And finally, talk a little bit about China’s governance. Certainly it has moved over the past several years to a much more authoritarian regime. How does that play with the Chinese people
[00:43:26] Dinny McMahon: and is there a danger in that? On this point, I’ve got a less sense of just how that’s playing out at the moment. I think people are certainly frustrated in China at the moment because, you know, economically things aren’t as good as they used to be. I mean, the opportunities aren’t there as they used to be. I mean, for 20 years, you know, with the economy growing between 8% and I think we got up to 14%, you know, the rising tide was lifting all boats. Yeah, sure, some people did better than others, but every year things were getting better and the opportunities were there. If you moved to the city, you could get a better paying job and then, you know, next year you could get another job which paid even better. You know, you went to a university and you knew that when you came out the other end, there’d be opportunity. But now you’ve had a lot of people lost well-paying jobs in the construction sector and there aren’t really, you know, they’re ending up in the services sector, you know, delivering food and the wages aren’t as good as they used to be. You’ve got high youth unemployment. So, you know, the opportunities that people expected when they came out of tertiary education, they’re just not there anymore. You know, sure, the economy seems to be growing strongly, but you’ve got this price deflation and so people’s compensation isn’t as good as what it used to be. People have seen, you know, for a long time people bought houses because they could be sure that the value of their savings that they sunk in their homes would always go up, right? If I, you know, back in what, 2015, 2016, if I bought a house in China, I bought an apartment, I could be pretty sure that the value of that asset would increase 120, 130% over the next decade. And so everything was improving for everyone. Look, I’m being a bit hyperbolic, but not by much. Everything was improving all the time for most people in China. And now we’re in a situation where people just don’t feel that anymore. The opportunities aren’t there like they used to be. And so what, how is that making people feel about the political system? That I’m a little less sure about, but certainly during the COVID years, there was a real mounting resentment over the way that the authorities had handled it. And, you know, now with this kind of ongoing economic unease, I think the authorities really have to be aware that, you know, if they can’t kind of get a hold on this over the next few years, it’s something that’ll, it’ll potentially, you know, complicate their lives if this sort of unease and disillusionment persists.
[00:46:10] Jeff Schechtman: Denny McMahon, I thank you so much for sharing all of this with us today here on the WhoWhatWhy podcast. It’s been great talking to you. Thank you. And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another WhoWhatWhy podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.
