Unemployment among China’s youth marks beginning of the end

Hey everybody, Peter Zeihan here coming to you from Colorado’s lost wilderness. You’ve got Colorado’s very own Stonehenge there behind me and the mosquito range of stuff Colorado just behind that. Where I’m going to be the next few days. 

Anyway, today we’re going to talk about a new little factoid that boiled up as I was on my way out here: youth unemployment in China is now higher in percentage terms than it is in Italy. Italy, probably the most moribund economy in Europe, and generally, the one with the worst economic profile. Average economic growth out of Italy has averaged over the last 20 years, 25 years to be negative. And have China facing a similar situation with employment is a very, very bad sign. 

Let’s break this down from a manufacturing point of view, because that’s really where this all hits. Number one, everyone’s reshoring — investment is flowing out of the country, even Chinese companies are moving. So that is a huge hit to the engineering model, and the manufacturing model, because if you have a huge amount of unemployment, already, that would normally say that you should be pushing down labor costs to make your jobs more competitive, your economy more competitive, that is not happening. Because, number two, young people in China don’t want to work in manufacturing, they want to work in information technology jobs, they want to work in the knowledge economy. 

But that brings us to the third problem, is that China sucks at those things. One of the things that allows you to have a meaningful knowledge-based economy is you have to allow your people to think, and when you’ve got a state that specifically cracks down on any sort of independent discourse on anything, and has now reached to the point that foreigners can’t even access economic data like weather data, you cannot possibly train up a mass employment system where everyone is capable of value added knowledge work. 

So more and more people don’t want to do the manufacturing work. At the same time, more and more foreigners don’t want to do the manufacturing work in China, at the same time, that the labor force is no longer right skilled for what the Chinese are actually decent at. And I would argue that the Chinese aren’t even all that decent at manufacturing anymore, because the cost of labor keeps going up. Remember, this is a country that is in a demographic bomb. Okay, so that kind of all of that is phase one. 

Phase two is that you should expect all of this to get significantly worse, with no chance of getting better. Chairman Xi has created a cult of personality that is one of the strictest in human history. He absolutely has more power into his person than any Chinese leader in history, and arguably, even more than say, the Roman Empire of old. You’ve got a population that doesn’t want to do the work that their economy is designed for another infrastructure is designed for, and Xi is ensuring that the labor force will never be able to evolve in a more productive direction that is more value added and more knowledge based. This is just what the Chinese system happens to look like now. 

But Third, and perhaps most importantly, and maybe a little sexy, is the last time the Chinese had this sort of disconnect between labor quality and the economic structure of the economy overall, you had a lot of very young people who thought they were going into the knowledge businesses, who suddenly discovered those jobs were never going to be available, and they got together and they went on a long walk together, and they had some protests. 

Now in China, this has been suppressed. But the rest of the world knows this is the Tiananmen Square protests that ultimately led to the massacres around 1989 to 1992, triggering the change in the political system that has proceeded until now. Only this time, instead of having a number of factions within the Chinese system, who can come together with a compromised system to play it forward, led by at the time Deng Xiaoping, this time, anyone who has any independent power has been utterly destroyed by Chairman Xi Jinping. 

So if we do get a break because of this, this is it. This is the end. Now, I’ve always believed that this is going to be the last decade of the Chinese system. But the degree of narcissistic myopia that we are seeing out of Beijing really has gotten to just massive levels. And now that we’re having massive disconnects within the employment system, it’s only a matter of time before that translates into massive disconnects in the economic system as a whole, and that cannot happen without a political after effect. I don’t want to suggest that this is the end. But this is how ends begin.

Take care.