If one subscribes to the narrative as presented by media headlines, it would appear that the relationship between China and the US is languishing at an all-time low. Some of this may simply be misunderstanding due to a lack of direct dialogue. For example, evidence suggests the “spy balloons” were likely anything but after further examination, despite US headlines during the crisis that stoked serious vitriol within the Chinese politburo initially, without functional relations between the countries to deescalate the situation. And of course issues concerning Taiwanese sovereignty and the South China Sea continue to reach potential flashpoints on a weekly basis.
Nevertheless, beneath the frosty rapport between the US and China lies a host of internal challenges within China itself — separate from its relations with the West. China is grappling with an unprecedented demographic predicament, owing to its aging population and the unintended consequences of its one-child policy.
Part of this predicament stems from the gender disparity among the younger generation. The cultural preference for boys in Chinese society and a high incidence of abortions when pregnancies involved daughters have resulted in a surplus of men (a grim reality of the economic dynamics within a planned economy which dictated the number of children a family could have for decades). Now, a significant proportion of these men remain unemployed. High youth unemployment rates across many Chinese provinces are curtailing economic growth and opportunity.
From an industrial viewpoint, Chinese manufacturing has been on the back foot since the COVID-19 pandemic. The CAIXIN Manufacturing PMI indicated contraction in June, mirroring the decline observed in May (with the index shrinking for five consecutive months at the end of the second half of 2022, and showing a decline in all but two months of 2023).
Western companies are becoming increasingly hesitant to do business with China. This reluctance partly stems from the government raids conducted earlier this year on several offices of US and European firms, including the consultancy, Bain.
In Q1 2022, foreign direct investment in China plummeted by 80% year-over-year. Goldman Sachs has even predicted that “outflows from China this year will offset any incoming investment, a dramatic shift for a nation that has consistently seen more money inflowing than outflowing over the past four decades.”
A recent Wall Street Journal article highlighted the struggles of a Chinese trade official who returned empty-handed from a European trip. He was quoted saying: “In my 20 years of trying to attract investments from Europe, this was the first time we didn’t sign even one memorandum of understanding.”
Meanwhile, the US has been gradually distancing itself from China. In a notable shift, for the first time in 15 years, the US is now importing more from Mexico and Canada, according to the latest 2023 trade data. American imports from China dropped nearly 25% year-over-year from January to May, while imports from its immediate neighbors saw substantial growth.
Ray Dalio, the legendary investor and founder of Bridgewater Associates, who has spent extensive time in China, is deeply concerned about US-China relations. In an April note, Dalio warned that he believes the US and China “are on the brink of war and have surpassed the point of peaceful resolution.”
Dalio argues that the US is “not in control of dealing with China because the US political decision-making system is fragmented” and “President Biden cannot single-handedly speak for or control the United States.” According to Dalio, the US has overstepped many of China’s “red lines,” including statements regarding Taiwan and continuing sanctions.
Dalio recommends that in order to de-escalate the rapidly freezing relations between the two nations, “President Biden should host President Xi at the APEC meeting in San Francisco this November.” He emphasizes that “all parties need to clarify that peace is better than war.”
Given China’s declining economic and demographic prospects, and President Xi’s need to maintain control over his party and citizens, we concur with Mr. Dalio’s perspective. Proactive intervention to prevent a conflict between the two remaining superpowers in the world is not just an option. It is an absolute necessity.
