Why China Will be the Big Winner of the 2020 Crisis

[Music] this is China what is still the world's foremost industrial economy has apparently been knocked down a peg or two as it's emerged into the new decade there has been wild speculation about companies divesting from the country as a response to the critical flaws and supply chains that have been brought to light because of this crisis the world today is heavily reliant on China to manufacture almost everything that we take for granted in our modern lives what is more is that even if something isn't actually assembled in China it is extremely likely that there are at least some components of the final product that are this has alternate Li come about because China is incredibly cheap and easy as a source of low to medium level manufacturing but if hypothetically the whole system was to shut down even if it was only for a month well that can cause issues very very quickly and shatter the delicate supply chains of the world's mega corporations now we are not here to explore China or supply chains or even manufacturing for that matter we have already made videos that go over all of these individuals in much much more detail but what does need to be addressed is the idea that this crisis will be the ultimate downfall of China as an economic superpower reports of companies desperately looking for supply chain alternatives and speculation about countries that are going to move in to take their place have been all over the news and perhaps there is some merit to this speculation but a lot of this may be ungrounded in genuine economics and rather just be the product of things that people want to be true if we actually take a look at the global economy and a position of nations like China within it we will see that through things like debt based diplomacy and an economy first mentality they are potentially going to be the big winners in all of this something that must be addressed instantly as that this virus is no longer an issue that is specific to one country it is now a global issue so it's not as if one country is going to lose ground to anyone else because of lockdowns or anything of that nature specific to them it's ultimately dependent on who is in the best economic position now this means that it in a morbid kind of way all the major super powers of the world are kind of on an even footing with this one calls first supply chain redundancies that avoid countries like China would be pretty much ineffective in situations like this because there aren't really any countries that haven't been negatively affected at this point beyond that companies are ultimately institutions driven by short-term profit CEOs and investors are going to develop supply chains that are going to produce the most cost-effective goods that will give them the highest profit margins situations like this are not accounted for because it does not make good economic sense to do so let's take two companies as an example the first company is your generic risk-taking multinational their share price is really only as good as their most recent earnings report and they're charismatic CEO is driven primarily by year-on-year profits it does not make any sense for this company to produce their product anywhere else but China China has cheap manufacturing it is close to component suppliers and they have a decent reputation for getting things done on time by getting everything done in one place the company also only has to operate a single factory with a fixed overhead it only needs to navigate around one set of laws it can ship everything from a single location and it can adapt quickly if a new product needs to be rolled out the second company though is a risk-averse hypothetical they see all this chaos and decide that they don't want to put all of their eggs in a single manufacturing basket so they set up different factories all over the world well they kind of lose out big time here they have to pay to maintain multiple facilities they have to work with multiple component supplies work around multiple national laws it becomes a nightmare of logistics but more importantly it's expensive there is no conceivable way that this risk-averse company would be able to produce items as most effectively as the normal company which means that they would be run out of business during the good times and even in a situation like we find ourselves in today they wouldn't be any better off so a lot of talk about companies looking for redundant supply chains was either middle management spiel or Hughley unfactual at worse but of course you may correctly point out that there are many companies that have multiple production facilities producing the same product all over the world what is going on here well what is going on here is trade restrictions sometimes is cheaper for a company to set up a factory and build products domestically than these for them to pay import taxes for all of their products this is most common with more expensive goods like cars it's why companies like BMW and Toyota have factories in Germany and Japan as well as China the United States and Mexico the battle between protectionist policies that favor local industries and supporting free trade is a back and forth struggle that was happening before the outbreak and will be going on well after it has finished it may exacerbate the us-china trade war but we will get back to that soon the only difference between countries like the USA Japan the nations of the EU and China is that the Chinese government has a lot more direct control over their economy they can and do manage their exchange rate they support their state-owned companies directly with public funds and even internally what they say goes if they say tomorrow that everyone gets back to work everyone goes back to work and while this isn't particularly liberating or conducive to a totally free society it does mean that they can enact vital change a lot faster than other economies during times like this if there is anything that is going to slow China down is curiously enough that they are getting too rich country's all tend to grow in relatively similar ways they start off by farming and then quickly they develop manufacturing and this drives them towards becoming a developed economy with a domestic market of cashed-up consumers the thing we're changing from farming to manufacturing is that workers and manufacturing roles can create more value and all other things being equal earn more money when people earn more money they can spend more money which means local businesses have more money and on non until wages rise everywhere this sounds great but it can lead to a scary phenomenon known as the middle income trap when workers in a society demand higher wages it can make the country less competitive as a global supplier sure there are advantages to building phones in China or setting up call centers in the Philippines but let's face it the biggest driver is the enormous pool of cheap labour to outsource all of that work to if a country loses this cheap labour they lose their competitiveness this all gets worse when the country is not quite yet rich enough to facilitate developed domestic economy like most wealthy first world nations do today hence they are stuck in this middle income trap South Africa and Brazil are great examples of this going terribly terribly wrong they are no longer cheap enough to be great manufacturing or outsourcing centers but they aren't rich enough to be self-sufficient markets just yet now China has kind of seen this coming for years and it has done a few things to prepare for this for starters it still has a lot of poor people yippy it also has a critical mass of manufacturing with lacks laws around environment or workers rights and this means it's sure manufacturing is still going to be very very cheap there despite not necessarily being the cheapest labor market in the world but perhaps most importantly it is investing into other countries to pick up where it left off China has been a major financier of infrastructure development in a wide portfolio of developing economies throughout Asia and Africa it has established ports and factories and modern farms in countries like Senegal Nigeria Pakistan and Zimbabwe which has been a great move for a few key reasons firstly it helps expand their influence in the same way that America has military bases all over the world China wants to flex its geopolitical muscles a bit too but perhaps more importantly than that it just makes good business sense China has invested billions of dollars into these countries through loans written by their state-owned banks but these go beyond just collecting interest if China was to loan the Government of Nigeria a billion dollars to build a new port they can put stipulations on that contract the big one has been this port must be constructed using a Chinese construction company which not only means that the money finds its way back into China but it also means that China's excess productive capacity is properly utilized you may have seen this imagery before these are Chinese ghost cities huge developments that could house hundreds of thousands of people brought about because China has just become too damn good at building things and kind of ran out of people that need to be housed now as far as investments go entire city's worth of real estate that would lay dormant because there is no one to live in them a pretty poor what has shown to be a better use of those resources is to actually use it in the country that needs them and collect their income from that instead this Chinese foreign direct investment has become more and more influential in recent years and it has culminated in mega projects like the built in road development that will directly link China politically and economically with dozens of its neighbors now things like the belt and road project deserve a video all of their own but why it's particularly important right now is that China is holding on to a lot of debt that is owed to them as a result of these projects a nice little added bonus of this is that it pushes the prevalence of World Trade denoted in Chinese currency which means that the currency may soon rival US dollars as a world reserve in the short term though these developing countries need to be exporting their goods in order to repay these debts that are noted in Chinese currency if these countries suddenly can't pay this debt back because as trade in the world economy has gone crazy well then China has the right to swoop in and take back what is owed to them in late 2000 and 19 China clem Mombasa port in Kenya this gave them a huge asset as well as effective control over the largest trading port in all of Africa and when a Chinese state-owned company claims the trading port guess who you are kind of forced into trading with yep that's right China the port of Mombasa was just one critical piece of infrastructure on the continent that fell into their hands due to debt concerns which goes to show a lot of these countries were on the verge of defaulting before the economic trade collapse if this carries on much longer it stands to reason that China will be able to snap up some increasingly valuable and influential pieces of real estate all over the continent and it will in turn have a center of industry that will provide wealth back to China without actually needing to produce anything in China now this is not necessarily evil in and of itself we have seen how the United States has benefited greatly off corporate empires that return wealth back to the United States for industry that has never happened inside the United States but the big difference here is that American companies tend to take equity risks rather than debt risks meaning that they own what they have invested in and if these investments go bad they are the ones who lose out but don't go away thinking that the USA is somehow an angel and all of this they're not but this whole process has a name it's called debt trap diplomacy which is where a rich country like China convinces a poor country like any given African nation to take on debt that they probably won't be able to pay back when they default no worries just take something from them that you now own and use that to strengthen the influence you hold over this nation by doing this China is effectively foreclosing on a new continent of cheap labour and natural resources and this global economic crisis is likely to just speed up the process so in the interest of fairness it is also important to explore the other side of the argument which is that China may just be in serious trouble at the best of times Chinese economic data is questionable and there is no reason to believe that their indicators during this crisis are any more reliable than their testing figures a massive reduction in emissions from the country is actually one of the best indicators we have of the equally massive reduction in industry the country has suffered this has led to what many are speculating are some very desperate moves by the government since the country is reopened the environmental laws the nation did have regarding emissions and pollution have been temporarily suspended this was on paper an attempt to stimulate industry because sometimes these regulations can be a burden on maximum output a factory that can burn through chemicals and pour out waste into local waterways is going to be able to produce more than a factory that has to adhere to some level of environmental decency so this may be a bit of a boost that these companies desperately need to get going again except it doesn't really work like that sure an individual factory giving the big middle finger to the atmosphere is going to work more efficiently but if every factory in a dense industrial area does this oftentimes the issues caused by poor air quality and water quality hurt the economy more than any slight advantage it would give them in manufacturing this gets a bit tinfoil Hattie but a fun little theory is that these lacks environmental policies are a bizarre way to save face given that government industrial output figures are so unreliable a lot of economists and institutions actually look at these emissions over the officially reported figures turning the coal burners on to eleven is a great way to bump up those emissions and give the impression that industry is going stronger than ever flaunting a poor side effect of a positive action it is literally the macroeconomic equivalent of some kid in the eighth grade giving themselves a hickey to show that they totally got it on to all their friends at school now look crazier things have been true but on a more realistic level nobody is going to deny that China is hurting from this it's an export economy that can export it's a manufacturing superpower that has nothing to manufacture it's the workshop of a world out of work their economy will fall into a recession but so will everybody else's global output is predicted to drop by over three percent this year and there is no reason to expect that they will be hit any harder than anybody else make no mistake we are living through history at the moment and trying times like this are roughest speculation about what the future may hold one of the big answers that everybody wants is what is going to become of the nation that is the logical starting point of this economic turmoil the idea that they are going to fall behind massively has a vindictive quality to it but the truth is it probably won't be the case we all know of people that use economic downturns like this to buy up cheap shares or real estate and it's likely that China with their huge foreign currency reserves and direct lending portfolio will be in a position to do the same thing but it will just buy up entire nations instead just because something feels right or because it's fair or even because it seems logical doesn't necessarily make it true introspectively we all have to admit that just a little bit we want the reports of a crippled China to be true but it doesn't mean that they are hi guys thanks for watching if you did enjoy please consider liking and subscribing if you really enjoyed please consider supporting the channel over on patreon like these lovely people did I hope this is again been one of those more controversial videos and I want to hear your opinions on the subject which you can share over on our Q&A session post on our second channel or our discord server if you want to chat with me directly links in the video description if you want to hop on to either of those thanks guys bye

Channel: Economics Explained

Views: 1,741,929

Rating: 4.6915774 out of 5

Keywords: why china will be the big winner of the pandemic, china economy, china debt trap, how the pandemic helps china, how the coronavirus helps china, how covid19 helps china, does covid help chinas economy, does coronavirus help chinas economy, does the pandemic help chinas economy, the economics of the coronavirus, the economics of covid, the economics of covid19, the economics of the 2020 pandemic, the economics of the pandemic, economics explained

Id: b07eafPe7pY

Length: 16min 38sec (998 seconds)

Published: Thu Apr 16 2020

Reddit Comments

[u/delorisdeloris]

Once again, categorizing African nations as childlike and incapable of making informed decisions. How ironic is the finger that accuses racism.

And at the end he goes into Chinese data being false, including COVID-19 data.

[u/[deleted]]

This video seems to misunderstand the Belt and Road initiative and follows the western opinion that it is luring African countries into debt traps. Further it seems to imply that China is deliberately doing this so that they no longer have to produce anything and can just suck the wealth from Africa.

This is definitely not a trustworthy analysis.

[u/radical_marxist]

Listening to liberal explanations of economics is so painful, they just don't understand the basics.

Edit: and of course the explanations always slip into antisocialism and sinophobia.

Edit 2: end of the video just goes fully into sinophobia. Not sure why the mods allowed it.

[u/[deleted]]

If China-haters can celebrate negative GDP growth rate for China, I can hope US GDP drops 50%

[u/USMilitaryOUT]

Good.

Fuck the USA and their rampant inflationary debt-traps snowballing into private control of state media and government

[u/stereoeraser]

This video makes it sound like China invented the Debt Trap. Debt trap was invented by the IMF and the sole reason why the IMF exists!

[u/lurker4lyfe6969]

I don’t know the validity of this guy’s point. He repeats things like debt diplomacy when academic investigations of African-China relationship had been debunked these claims. See Deborah Brautigam of John Hopkins University have done the legwork when it comes to this subject.

Here’s her blog: https://deborahbrautigam.com/blog/

She’s got two published books tackling this issues as well.

• The Dragon’s Gift

• Will Africa Feed China

Ironically, the video lectured against being vindictive and believing things to be true just because they don’t like China. It seems to me the author of the video should follow his own advice

[u/garagegymer]

Western racists on suicide watch.

[u/stephenfa]

Even China haters still needs China for those sweet, sweet views.