The Chinese Boogeyman Stumbles

It’s a human trait to project fears onto adversaries and overstate their strength. In 1940, the German Wehrmacht was deemed invincible. In the 1950s, the Soviet Union was widely seen as winning the Cold War. In the 1980s, America was supposedly destined for dominance by the Japanese.

Wrong on all counts, of course. History is rife with such examples. So nowadays, when the fear-mongers argue that the wily, far-sighted Chinese will crush the decadent West, I stifle a yawn.

To be sure, China remains a daunting competitor, economically and militarily. However, the mercantilist mandarins of the Chinese Communist Party aren’t on the verge of conquering the world. Just ask the hoodwinked bondholders and clients of debt-ridden property developer China Evergrande Group (OTC: EGRNF), which still struggles to avoid a “Lehman moment.”

The new red scare…

The stock market rally hit a brick wall this week, partly because of jitters about what Federal Reserve Chair Jerome Powell might say on Friday, but also because of recent signs that China’s economy is in deep trouble.

Data published this month by China’s National Bureau of Statistics revealed that China’s economic slowdown worsened in July, amid the country’s real estate crisis, growing mountain of debt, and draconian COVID lockdowns.

China’s second-quarter gross domestic product (GDP) growth slowed dramatically to just 0.4% in the second quarter from a year ago. From January to July, national real estate development investment in China posted a year-over-year decrease of 6.4%.

But it’s not just a bad quarter. China’s residential and commercial property market, which drives about a third of the country’s economy, is on the brink of implosion. China’s overall debt has risen sharply over the past decade, mostly the result of credit funneled to state-owned enterprises (many of them “zombie” firms) and dubious construction projects.

What’s more, this month five of China’s biggest U.S.-listed, state-owned giants, valued at a collective $318 billion, announced they would delist from the New York Stock Exchange (NYSE), as Washington and Beijing squabble over allowing American regulators to audit Chinese companies. Many of China’s biggest companies are infamous for their opaque accounting.

A mix of headwinds and tailwinds…

The major U.S. stock market indices slumped Monday and Tuesday, but they were regaining their footing in pre-market trading Wednesday.

Anticipated commentary from the Fed’s Jackson Hole confab later this week has investors on edge. But second-quarter corporate earnings are coming in better-than-expected, and the U.S. economy is hanging tough.

PMI Manufacturing and Services reports released Tuesday provided mixed but ultimately reassuring signals on the American economy. The manufacturing PMI in August fell to 51.3, versus the 51.8 that was estimated and the 52.2 posted in July. Services PMI in August settled at 44.1 versus the 49.8 estimate and 47.3 in July. That means the composite PMI came in at 45, down from 47.7 in July (see chart).

The good news is that the manufacturing index remained in expansionary territory this month, although services activity slowed. Over time, I expect consumption to shift back toward services spending. And don’t forget, the jobs market remains strong.

However, in bad news for inflation fighters, OPEC+ has been hinting this week that the cartel will cut crude oil production. The goal would be to make up for any added production from Iran if that country strikes a nuclear deal and the Western oil embargo is lifted. The per-barrel price of crude has been surging back to the $100/bbl threshold.

The main market event will be Powell’s speech on Friday, and Wall Street suddenly has the queasy feeling that he will strike a hawkish tone. The betting now is that the central bank won’t pause its tightening until 2023 at the earliest. Hopes for a dovish pivot in September are rapidly fading.

Read This Story: Bad News for China Means Good Tidings for U.S.

As for China, sometimes the country’s worst enemy is…itself.

The rise of far-right “populism” around the globe and the nationalist swagger of Russia and China have sparked a debate as to whether authoritarianism is economically and politically more efficient than democracy. We had the same debate during the Great Depression in the 1930s. Then, as now, the answer is an emphatic no.

Democracies enjoy greater flexibility and resilience because a variety of voices, stakeholders and interest groups sit at the table to compromise. But when major decisions are made by a dictator and a coterie of yes-men, self-defeating catastrophes often ensue. Moscow’s invasion of Ukraine comes to mind.

Western democratic capitalism is by no means perfect and makes mistakes of its own, but it will prevail. Will China one day rule the world? As Warren Buffett once wrote: “Never bet against America.”

Successful investors like Buffett look beyond the glib narratives about China versus America. They pinpoint unstoppable “megatrends” that outlast temporary headlines and transcend national borders.

That’s why, after months of painstaking research, our experts have come up with eight mind-blowing predictions for the future. The time to invest in the companies behind these trends is now, before their shares get bid sky high. Click here for details.

John Persinos is the editorial director of Investing Daily.

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