China's Struggling Economy Sparks Tensions

The Chinese economy can't seem to catch a break...

First, the country faced a debt crisis in real estate. The government is now trying to bail out the sector by pushing entire regions of people to buy homes outright.

Meanwhile, China's younger citizens are facing record-high unemployment... Youth unemployment reached 21.3% last June, putting more pressure on the government.

Bad news then came from the production side. China reported a factory activity contraction in May after solid growth in the first four months of the year.

This decline in manufacturing – plus rising tensions with China's biggest trade partners, the U.S. and the EU – dealt a big blow to the country's export-focused industries.

Export is the flagship of the Chinese economy. That's how it plans to achieve its 5% economic growth target. And economic growth is crucial in order for China to maintain political stability and enhance its global influence.

In short, China's government is in a tough position.

We've spent the week delving into topics I covered in my "fireside chat" with longtime Altimetry friend Col. Jon Shaffner.

(If you haven't read the first two parts, you can do so here and here.)

Today, we'll wrap up this three-part series by examining the geopolitical repercussions of China's weakening economy... and what could happen next.

As the economy worsens, the Chinese government finds itself backed into a corner...

And it's making the government more dangerous.

When it comes to a weakening economy, it's only a matter of time before people start to complain. In China, working-class protests increased more than threefold in the last quarter of 2023 compared with fourth-quarter 2022.

The government needs to shift the focus of its unhappy citizens somewhere else... so they don't turn on the regime. A favorite strategy of autocracies is to threaten (or actually go to) war with an enemy.

If you've paid any attention to headlines in the past several years, Taiwan probably comes to mind.

China-Taiwan tensions date back a long time. Some people believe Taiwan needs to be reunified with the mainland. An attack would garner support from these folks.

Taiwan also holds a 68% share of the semiconductor market. A potential takeover could help China catch up in the global chip competition, which it's losing so far.

On the other hand, war with Taiwan would have a significant initial cost to China... both in terms of money and actual goods. And Taiwan might be able to defend itself in the short term.

China seems to think the cost of war would outweigh the benefits for now. However, if the Chinese economy gets bad enough... all bets are off.

The China-Taiwan region is crucial for global supply chains... and the U.S. is already taking precautions.

The world is highly reliant on Taiwan for semiconductors. And semiconductors are the backbone of pretty much all modern technology.

COVID-19 laid bare the risks of relying on far-off countries for our manufacturing needs. Pandemic-related shutdowns created severe bottlenecks in the U.S. supply chain.

Now, our corporations are backtracking. They're shifting supply-chain investments away from China... to the U.S. and nearby friendly countries like Mexico.

In our fireside chat, Col. Shaffner and I went deeper "in the weeds" on China and the chipmaking landscape. We discussed the CHIPS and Science Act... China's often-inconsistent economic data... and how a China-Taiwan war could play out.

Plus, we highlighted a stock that's set to soar as U.S. manufacturing comes back home.

You can view the first 10 minutes of our chat absolutely free for a limited time only. I encourage you to watch the preview all the way through – we give away one of our favorite stocks for today's environment.

Check it out here... and learn how to access the full interview with a 30-day trial to my Hidden Alpha advisory.

China's economic situation is getting more dire by the day. We don't expect it to ease up on Taiwan. The U.S. will need to look closer to home for supply-chain stability.

Regards,

Joel Litman
June 21, 2024

P.S. Current Hidden Alpha subscribers can view the fireside chat in full right here.