The impending precarious era of high inflation in China

The study of economic growth is mandatory for those who pay attention to economics, and that is precisely what we do at ANBOUND. As early as 2013, we conducted a study on China’s economic growth through information analysis methods. The conclusion is that China’s economic growth cannot continue to grow at high speed, but will decline in stages. In an ideal scenario, approximately every 10 years, the average level of economic growth will decline by one percentage point. After three decades, its growth will reach 5%, forming a consumer-oriented society. The end result is a pyramid-shaped growth trend, which is why this finding is called the “pyramid pattern.”

This is a study that was done about a decade ago. Initially, I assumed that as long as the future level of economic growth was defined, the Chinese economic community would conduct extensive research based on this to solve other obvious problems, such as inflation, industrial structure and investment. , and other development issues. However, I hadn’t anticipated that instead of conducting sound prediction research, the community would be concerned with providing journalistic commentary on events that have already happened. Consequently, nothing was done. With this in mind, further discussion of the matter will be deliberated here.

Defining the rate of economic growth is part of basic research. In summary, our research indicated that China’s growth will be gradually lowered to 5% of the double-digit rate around 2013. This long-term analysis amounts to changing the Chinese economic model at that time dominated by the idea of ​​growth by -investment. Instead, he proposed a sort of “degrowth” model. This result is of course in stark contrast to the optimistic view of China’s economic growth at the time. The basic view of a number of renowned economists was that the Chinese economy could continue to grow at high speed for “decades”. The conclusion of our research, therefore, has not attracted much attention from the business community, media, society and policy makers. At most, some of them knew a little.

The problem is that the “decline” of the Chinese economy has begun.

There are several possible reasons for this, but by 2022, the Chinese economy has almost directly entered the phase of fixing the growth rate at 5%. Such a curve of economic growth rate is quite steep, much steeper than what we originally expected in 2013. In fact, it only took 7 years to complete the decline phase which we estimate would take 30 years . This means that the Chinese economy is in serious and rapid decline, which clearly shows that it is already in a state of substantial “decline”. What effect will such “degrowth” have on China? The answer is that China will enter a precarious era of high inflation.

What lies behind is not complicated. It took only 7 years for the country’s economic growth to quickly reach the state where it really should take 30 years to adjust. This, in turn, will significantly reduce the possibility of a benign adjustment and have serious consequences in the event of an economic downturn. As economic growth represents and reflects the size of the market and revenues, a rapid decline in economic growth means a relative shrinkage of the market and a decrease in revenues. Therefore, such a scenario can be frightening. When costs are nearly fixed and cannot be squeezed and lowered, this reduction in income and shrinking markets will put considerable pressure on supply, rapidly converging to create unexpected inflationary pressures. Put simply, lower income translates into a relative and absolute rise in commodity prices. On the consumer side, there will be more things and products that will become unaffordable. As a result, an era of rapidly rising prices could be imminent.

In an economic era of “decline”, it would be difficult for companies to make a profit and losses would be too frequent. Although the products could theoretically be sold at higher prices than before, the costs incurred by these companies would also be higher. Faced with higher levels of inflation, many of them would not be able to maintain their production. With more individuals and businesses unable to cope, the cycle would repeat itself, resulting in an even lower level of economic growth. When this happens, the market contracts and incomes fall, while inflation worsens. When there was economic growth, the 8% inflation rate in the past would still be tolerable. Yet, under the “decline” condition, an inflation rate of perhaps only 5% would be disastrous.

A truly dangerous era has thus emerged.

We have pointed out in the past that many of the problems China faces are due to “speed”, and this is also true for the problems China faces today. As it stands, such “decay” is basically caused by “inappropriate speed reduction”.

The question is, what will Chinese inflation be in the future?

The answer requires the calculation of a model through economic statistics. I personally estimate, from the multiple conditions of declining economic growth, that the 5% to 8% level of inflation will be relatively visible, although a level of 10% or more is also possible. Some might point out that in my book Crisis Triangle, I mentioned that excess production capacity will be driven by excess capital, while investment will mainly lead to inventory and debt, and China will not face inflation problems. Why then, am I now arguing that the main problem the country will face will be inflation?

In reality, excess capital, excess productive capacity, as well as inventory and debt, are all phenomena under conditions of economic growth. Economic growth offers potential expansion of scale, driving continued investment. Although there are issues with rising stocks and debt, a prosperous supply can offset inflationary pressures. The current situation is completely different: we are faced with the reality of “degrowth”. Although the economy continues to exist, the conditions for growth no longer exist, so inflation becomes a real possibility.

Economic growth is in fact a systematic phenomenon of the social environment. It’s not just about growth rates, or just numbers and numbers. If the rapid and slow economic growth continues, China’s current and future economy will experience “decline”. Faced with this situation, no means or approach would bring results, since the underlying logic and the economic structure of society have undergone uncontrollable changes.

We will very much see a different China in the future.

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