Perhaps not cutting exactly. That’s far too drastic a measure given how intertwined we’ve become with them after decades of developing the links.

No, the more subtle term is “de-coupling”, and it is actually happening, and it’s China’s own actions that are the cause more than any initiative launched by the West, since Western companies have become addicted to lost-cost supply chains, even when they had quality problems, as described with two business executives from a decade ago:

“Acme” understood that Chinese manufacturing was inferior to its US and Mexican manufacturing, so it disengaged from China before it could cause any more problems. “Bravo” on the other hand was not going to ditch China until its peers did so first, even though it was hardly a secret that Chinese manufacturers were producing products that were inferior, sometimes dangerous, and often deadly.
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There was seemingly no limit to the pain Chinese manufacturers could inflict on American importers that would get them to re-think their commitment to Chinese manufacturing…until the tariffs forced them to re-think it.

Ah yes. Trump’s dreaded tariffs, hated by Libertarians and plugged-in Centre-Right politicians alike, plus some executives who had not yet got the message via their own problems, where the “cost” can show up in more ways than the profit & loss columns. One of the many problems the Chinese Lung Rot Pandemic revealed was that the West had grown too reliant on those supply chains, and when they hit problems those “one-off” costs of disruption start to make the previous cost savings look less impressive.

During a recent conference of regional business leaders at which I was in attendance, an executive of one company was asked about tariffs and the global supply chain squeeze, and what impact they were having. He started his response by stating that “China, Inc. was another overhyped and destructive management fad.” He went on to state that Trump’s Chinese tariffs turned out to be a welcome catalyst for many businesses to finally start disengaging from China.

Even the Centre-Right has started to notice – at least in Australia and the USA, New Zealand’s CR crowd have not yet seen the way this new wind is blowing:

There has been a sense in financial circles that the fever among American executives to shorten supply lines and bring production back home would prove short-lived. As soon as the pandemic started to fade, so too would the fad, the thinking went. And yet, two years in, not only is the trend still alive, it appears to be rapidly accelerating.
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The construction of new manufacturing facilities in the US has soared 116% over the past year, dwarfing the 10% gain on all building projects combined, according to Dodge Construction Network. There are massive chip factories going up in Phoenix: Intel is building two just outside the city; Taiwan Semiconductor Manufacturing is constructing one in it. And aluminum and steel plants that are being erected all across the south
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In January, a UBS survey of C-suite executives revealed the magnitude of this shift. More than 90% of those surveyed said they either were in the process of moving production out of China or had plans to do so. And about 80% said they were considering bringing some of it back to the US. (Mexico has also become a popular choice.)

Such thinking – dismissed as mere Trumpish China-bashing just a few years ago – has begun to take off in Right-wing circles concerned with security and defence that were gung ho for China as recently as the 2010’s, 10 Things The U.S. Can Start Doing Right Now To Counter China’s Dominance, here summarised and you can read the detail at the link:

  1. Ban Dangerous Chinese Social Media Apps.
  2. Ban the Import and Sale of Chinese Drones.
  3. Risk-Manage Inbound Chinese Investment.
  4. Reject Damaging ESG (Environmental, sSocial, and Governance) Policies for US companies.
  5. Increase Munition Production and Arm Taiwan.
  6. Foster Innovation in the U.S. Maritime and Shipping Sectors.
  7. Expand Export Controls on technology.
  8. Hold China Accountable for Covid-19.
  9. Prioritize the Pacific Islands.
  10. Establish a Quad Select Initiative (the U.S., Australia, India, and Japan)

But increasingly it may be the problems of China and it’s own actions that drive this more than the West’s, starting with Xi Jinping’s relentless drive for power which is going in the usual communist direction of failure:

Hu Jintao humiliated
  • His creation of internal enemies (nicely dissected by a Chinese journalist, Deng Yuwen, fired from a prestigious job because of his opposition to the relationship with North Korea), including the Hu Jintao event at the 20th CCP Congress.
  • His total dominance removing the obscurity of China’s plans for dominance and thus making it easier to oppose.
  • An obsession with control over Covid-19 producing unneeded protests.
  • Debt and foreign investment problems, especially with the much touted (and feared) Belt and Road initiative.

That power, especially with Xi’s stated desire to rank national security above economics and business, is starting to scare foreign investors:

The U.S. Department of State recently issued a travel advisory, warning Americans to reconsider going to China, Hong Kong, and Macau… The warning came as the Sino-U.S. relationship deteriorated, and the Chinese Communist Party has increasingly resorted to holding foreigners as hostages and demanding their home countries make political concessions.
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In early March, U.S. billionaire Mark Mobius, once a champion of investing in China, complained that he couldn’t get his capital out of China due to the government’s restrictions. He warned other foreign investors to “be very, very careful when investing in China.”

In the days that followed, China’s Finance Ministry suspended the operations of accounting firm Deloitte’s Beijing office for three months and imposed a $31 million fine on the firm, alleging “serious audit deficiencies” in the firm’s auditing work for state-owned enterprises. Then Chinese police raided the Beijing offices of Mintz Group, a U.S. dual-diligence firm, and detained all five Chinese employees. Later that month, the Cyberspace Administration of China announced a cybersecurity investigation into U.S. computer memory maker Micron Technology. In April, authorities questioned U.S. consulting firm Bain & Co.’s employees in Shanghai.

So you no longer need tariffs or supply-chain problems to de-couple from China. The CCP could end up taking your money, and you, for the crime of disagreeing with them:

The smart money has been moving away from China in recent months, as foreign investors sold Chinese debt for six consecutive months, and foreign direct investment in China reportedly fell to $20 billion in the first quarter of this year, compared to $100 billion in the same period last year. Goldman Sachs predicts “[capital] outflows from China this year will cancel out investment going into the country,” a shocking reversal for a country that has relied on foreign investments to propel its economy for four decades. 

As the Spectator puts it, “the country wants foreign investment while attacking foreign companies”, and that this is wanton economic self destruction.

CEO’s like Tim Cook (Apple), Elon Musk (Tesla), Bill Gates (Microsoft) and others have not yet got the message, but sooner or later the freedom of thinking that enables their businesses will cause them to run afoul of the CCP.

But even if Jinping’s communist obsession with centralised control was not making things worse, there are basic problems starting to bubble up that are probably beyond any form of control:

China’s Demographics: Even Worse Than You Think (video at link):

  • “Here is the new data, and as you can see, the number of children who are under age 5 has just collapsed, and they’re now roughly twice as many that are age 15 as age 5.”
  • “What happened back in 2017, well before Covid, is that we had a sudden collapse in the birth rate, roughly 40% over the next five years among the Chinese, the ethnic Han population, and more than 50 percent among a lot of the minorities. And that is before Covid, which saw anecdotally the birth rate drops considerably more.”
  • China aged past the point of demographic no return over 20 years, ago and it wasn’t just this year that India became the world’s most populous country, that probably happened roughly a decade ago. And it wasn’t in 2018 that the average Chinese aged past the average American, that was probably roughly in 2007 or 2008.”
  • “This is not a country that is in demographic decay, this is a country that is in the advanced stages of demographic collapse. And this is going to be the final decade that China can exist as a modern industrialized nation state, because it simply isn’t going to have the people to even try.”
  • “Labor costs you’re having now or as low as they’re ever going to be. Consumption is as high as it’s ever going to be.”

Labour costs will rise and consumption will fall, I hear the Western business class gasp?

Yep. And if you’re a New Zealand dairy farmer you might especially want to think about the degree to which China’s peak consumption applies to dairy products, although there may be some “good” news on that front, again thanks to Communist’s limitless desire for centralised control.

China’s Looming Agricultural Melt-Down

Like Mao during the Cultural Revolution, Xi is pushing a new program of “agricultural management.” In practice, this means hundreds of thousands of party bureaucrats or simply average job seekers turned into state-sanctioned “agriculture managers” (effectively rural “enforcers” for the CCP) descending on villages and small towns – a nightmare scenario for farmers.

These enforcers have already sowed resentment and chaos in rural communities. In one instance from earlier this year that went viral on Chinese social media, agricultural managers threatened to uproot backyard fruit and vegetable plots as part of a rural “beautification” campaign.

The article quotes one Dr. Song Yongyi, a former Red Guard and follower of Mao who is now a professor at the University of California, warning that if this nonsense continues to be pushed Xi will get a repeat – hopefully on a smaller scale – of The Great Chinese Famine of ’58-’61, that killed tens of millions.

All of these factors have already led to the “surprisingly” weak rebound of the Chinese economy from the C-19 pandemic responses. Admittedly there are analysts who were not surprised, given their knowledge of the factors noted above, but as usual, the Business Class…

Entering 2023, the relentless drumbeat of Wall Street consensus was pounding out one consistent rhythm: China is back. After years of lockdowns and suppressed output, economists and investors cheered the end of Beijing’s zero-COVID policy and the economic boom that was sure to follow. The colossus-in-waiting that is the Chinese consumer was about to roam freely, analysts said. This was great news for the whole world — everyone would benefit from the globe’s second-largest economy getting healthy.

Nope. Both import and export trade has been weak, the Chinese stock market rebound is weak, and debt continues to grow – Nobody knows how much debt China has accumulated, but total country indebtedness could be an amount equal to 350% of GDP – so don’t expect any Keynesian spending blowout like the post-GFC 2010’s. Also the consumer portion of China’s GDP is 37% compared America’s 70%, so unless you want more ghost cities the Keynesian attempt probably won’t work anyhow. As long as twenty years ago there were people who pointed out that while China was copying Japan’s 1950′-70’s export model to grow the economy and that it would likely work, sooner or later they’d have to create a solid consumer economy. Japan never really did and, it would seem, neither has China.

The debt problem is not just the Western one of profligate governments and foreign debt; China’s debt problems start at the grass roots of society:

For years, China’s local governments funded themselves largely by selling land to property companies. In the US, we fund local governments through property taxes. China doesn’t have that, and smaller, poorer provinces are already begging for help because the way they used to raise funds is no longer available.

Which feeds back up to property developers, then to home owners. Over 70% of China’s wealth is tied up in real estate. Add in Xi’s actions crimping exports and foreign investment and it means even the Business Class is wising up:

The fizzled reopening isn’t just a short-term disappointment, it’s a sign that the old China is gone. The mechanisms that drove the “Chinese miracle,” a triple-decade transformation that made the country an international force, have broken down. The bubble in China’s property market finally popped. And because of real estate’s central role in the economy, the painful process of absorbing those losses will continue to suck money away from Chinese households, banks, and China’s massive web of local governments. China’s working-age population is getting old, and there are fewer young people to replace them than at any time in the country’s modern history. Exports remain key to the economy, but countries that once championed free trade have turned from globalism to protectionism.

That last comment is an ideological temper tantrum: the points made in that article itself, plus the others made here showing that Western businesses are simply starting to protect itself from myriad Chinese problems, are simply examples of normal business pragmatism, not ideology:

The legendary hedge-fund manager Stanley Druckenmiller, a longtime believer in China’s growth who described the entrepreneurial energy in the country before COVID as “New York on crack,” painted a grim picture of the future for a crowd of attendees at the Bloomberg Invest Conference in June.

“Looking out 10 or 15 years, I just don’t see it. Unless there’s a change in power at the top, I think that’s going to be a very undynamic economy,” he said. “We’re expecting a sugar high and some kind of robust growth there for the next six to nine months, but looking out, I do not look at them as a big challenge to the US in terms of economic power and growth.”

Now I wouldn’t go as far Gordon Chang in declaring that China’s Economy Is Headed For One Of The Largest Meltdowns Ever, especially since I read his book The Coming Collapse of China… over twenty years ago. But to be fair to Chang the central-argument of that book was the indebtedness of Chinese SOE’s, the CCP’s arm-twisting of banks to keep lending to them and the inevitable end-game. It’s a bit like predictions of fallout from US Federal debt levels; maybe you’re out by twenty years or more, but given no change from the path there has to be an ugly end-point. Moreover, Chang did not see some of the problems now hitting China, but which add weight to his key point.

The Communist Party knows—and has known for a long time—the game could not go on forever. Wen Jiabao himself in 2007 talked about what has become known as the economy’s “Four Uns.” Growth then, he said, was “unstable, unbalanced, uncoordinated, and unsustainable.”

But whether the result is a slow, painful, grinding economic contraction or a sudden shock, it’s clear that internal Chinese problems and CCP policy focused on control and security, combined with Trumpish protectionism, a US bi-partisan desire for America to be less reliant on China for security reasons, and the straight-forward pragmatism of Western businesses to have higher quality, more reliable supply chains than China can offer, are leading to de-coupling of the world, especially the West, from China.

And from a local perspective, does New Zealand realise this yet?