Zeihan, Japan and China

I noticed a couple of days ago a video by Peter Zeihan that made predictions about the US withdrawing as the global cop which would trigger World disorder, wars of the frequency seen between 1800-1945 and collapse in global trade. It also predicted that from this disorder than Japan would emerge as the dominant power in Asia and that China would either break apart or remain unified but poor.

I will review older Zeihan predictions. I will review what is happening with Japan and China.

Zeihan has been predicting China’s meltdown since 2005. He repeats the call for China meltdown and possible breakup or breakdown multiple times. In 2010, he said it would happen within 3-5 years.

In a recent video he says again that China will have major problems soon and that Japan emerges as a dominant power. He does not talk about India in that recent video. He is also positive about the ASEAN. Nextbigfuture is also positive about the ASEAN having 5-8% GDP growth on a fairly consistent level.

Nextbigfuture predicts that China will be dominant economically and militarily over Japan. India will pass Japan in nominal GDP in the 2024-2033 timeframe. The most likely passing time for India over Japan is 2026-2028.

Nextbigfuture predicts that China and USA will work out some trade deal in the 2019-2020 timeframe. China will likely cheat on whatever intellectual property arrangement is worked out. Nextbigfuture predicts the World trade system will not collapse. Nextbigfuture predicts that there will be a mostly maintained world order. Nextbigfuture predicts no major wars between China, USA, Japan, India, UK, France, Germany or Russia from now to 2040. The nuclear powers will not fight directly from now to 2040. There could be moderate skirmishes say NATO v Russia over Ukraine or something less than full Divisions engaging between China and India on borders.

Other than a possible even larger trade war, where the USA tariffs all China’s goods and China retaliates and Trump picks trade fights with some other nations, there will not be the disorder or trade collapse that Zeihan described from now to 2040.

Nextbigfuture predicts that China could have recessions but China will not have negative GDP growth for more than three years in a row from now to 2030. Nextbigfuture predicts that China will have cumulative nominal GDP growth of at least 40% from 2019 to 2030. Nextbigfuture predicts that Japan will not get within ten percent of China’s cumulative nominal GDP growth over the Jan 2019 to Dec 2030 period. If China gets to 40% then Japan does not get over 30%. If China gets to 50% then Japan does not get over 40%.

Reviewing Zeihan and STRATFOR

In 2010, Peter Zeihan was Vice President of Strategic Intelligence for STRATFOR.

STRATFOR is a geopolitical consultancy which was founded in 1996 by George Friedman. Friedman wrote the book “The Coming War with Japan” in 1991. For prediction accuracy, you may recall the terrible second war of the Pacific between the USA and Japan…Oh that’s right it never happened in our reality.

The book claimed a military confrontation between the United States and Japan is likely within the next 20 years. According to the authors, the issues are the same as they were in 1941: Japan needs to control access to its mineral supplies in Southeast Asia and to have an export market it can dominate. In order to do this, Japan must force the United States out of the western Pacific. There is little effort to explore the substantial differences between the 1940s and the 1990s.

Those were Friedman’s mistakes. Let us look at Zeihan.

Zeihan led the 2010 STRATFOR forecast for the decade. Zeihan was at STRATFOR from 2000 to 2012. He made their predictive models.

The 2005 prediction of Zeihan and STRATFOR:

In 2005, STRATFOR forecasted – China will suffer a meltdown like Japan and East and Southeast Asia before it. The staggering proportion of bad debt, enormous even in relation to official dollar reserves, represents a defining crisis for China. China will not disappear by any means, any more than Japan or South Korea has. However, extrapolating from the last 30 years is unreasonable. … At the same time that we see China shifting into a dramatically different mode.

In their 2010 Review of 2005, they claim that China’s slowdown from 2005-2010 meant that they were somewhat right about China. Nothing remotely similar to a Japan-style crisis happened and the slowdown was similar to China’s growth changes from 1993-2000.

Southeast Asia had the big recession in 1997. Malaysia and Thailand had a few more stumbles afterward. They are back to growth in the 4-8% per year range. So even if China has a full-blown recession, it does not follow that it would not return to 4-6% GDP growth. The US has recessions and then returns to 1 to 4% GDP growth. The US had -3 to2.5% GDP growth during the 2008-2016 Obama Presidency.

Japan’s growth has been -2% to 2% from 1989 onwards. With a -5% in 2009.

source:

China has not yet faced its Japan-style crisis but we continue to forecast that it will — and before 2015. [per Zeihan]

The ability of China to continue to supply cheap exports to the United States might come into danger. Not on the whole, because all of the Chinese regional cities will still have an interest in doing that, even once the Chinese system cracks. But you’re going to have to pay very close attention to your supply chain there as the politics of China become unglued.

In 2010, Zeihan said we expect the economic collapse of China in this coming decade. We’ve been talking for awhile about how the economic system there is remarkably unstable and we think that they’re going to reach a break point as all of the internal inconsistencies come to light and shatter. By the end of the decade, it’ll be pretty obvious to everybody that the China miracle is over.

Here is a Video of Zeihan Talking in 2011 in Calgary About China

The Whole talk is about why China’s system will break. The predition at 10:10 is China’s system – economic and unity will break in 3-5 years from 2011. So 2014-2016 was the prediction.

Around 7 minutes of the video, he talks about how the chinese provinces get messed up in the breakup.

Zeihan Hates China’s Geography – China Used Three Gorges Dam to Increase River Cargo Capacity

China megaprojects allow it alter its geography significantly. Three Gorges and other dams deepen China’s river networks. China ships down massive grand canal.

In 2014, the throughput of the five-tier ship lock of the Three Gorges Dam will hit 110 million tonnes.

One of the key benefits of the vast infrastructure project was an increase in shipping capacity, but now engineers are struggling with the challenge of how to provide more room for cargo on the Yangtze River.

The dam has made the river deeper and slower, allowing for easier navigation – especially upstream – for cargo and passenger vessels. The limiting factor for cargo, however, is the capacity of a five-step lock and a soon-to-be-completed ship lift to transport vessels across the 181-metre high dam.

The throughput at the ship locks of the Three Gorges hydropower project reached a record high of 138 million tonnes in 2017.

China has put a new container ship with a capacity of 1,140 standard containers into service on the country’s longest river, the Yangtze, as part of an upgrade of vessels on the waterway.

The ship was commissioned to go on route between the port of Wuhan, capital of central China’s Hubei Province, to the Yangshan Deep Water Port in Shanghai on the river’s estuary, on Friday. The route is about 1,000 km long.

The Yangtze is the world’s busiest waterway. More than 2.3 billion tonnes of cargo are transported through ports on the main stream of the river every year, both imports and exports.

The new ship is 130 meters long, nearly 24 meters wide and has a maximum load of 13,600 tonnes.

China has megaprojects and ships in the 100 million ton range down the Grand Canal.

China ships about 6.5 billion tons by water, 34 billion tons by truck, 3 billions tons by rail, 750 million tons by pipeline and 7 million tons by air.

US Army Engineers Will Deepen the Mississippi to 50 Feet

The US is also doing some river enhancement.

The 230 miles of the meandering Mississippi River on either side of New Orleans are home to the world’s largest port system. Collectively, the five deep-water ports on the lower Mississippi River — New Orleans, South Louisiana, Baton Rouge, St. Bernard, and Plaquemines — handle more tonnage than any other port in the world, providing billions of dollars in annual economic impact and supporting hundreds of thousands of jobs.

Nearly 12,000 ships — including 6,000 oceangoing vessels — travel the lower river corridor annually, carrying 500 million tons of cargo and 700,000 cruise passengers. Those numbers may soon increase, as the U.S. Army Corps of Engineers has a plan to increase the depth of the Mississippi River to accommodate larger cargo ships built in the wake of the Panama Canal expansion.

More 2010 Predictions from Zeihan

China faces a quadruple bind. [2010]

First, China’s current economic model is not sustainable. That model favors employment over all other concerns, and can only be maintained by running on thin margins. Eventually, manufacturing margins turn negative as they did in Japan in 1991 and Indonesia in 1998. Second, the Chinese model is only possible so long as Western populations continue to consume Chinese goods in increasing volumes. European demographics alone will make that impossible in the next decade. Third, the Chinese model requires cheap labor as well as cheap capital to produce cheap goods. The bottom has fallen out of the Chinese birthrate; by 2020 the average Chinese will be nearly as old as the average American, but will have achieved nowhere near the level of education to add as much value. The result will be a labor shortage in both qualitative and quantitative terms.

Finally, internal tensions will break the current system. More than 1 billion Chinese live in households whose income is below $2,000 a year (with 600 million below $1,000 a year). The government knows this and is trying to shift resources to the vast interior comprising the bulk of China. But this region is so populous and so poor — and so vulnerable to minor shifts in China’s economic fortunes — that China simply lacks the resources to cope.

Japan is the world’s second-largest economy. It has spent the time since 1990 in a holding pattern, focusing on full employment and social stability instead of growth. That process is drawing to an end and — in a manner that both reflects China’s present situation and heralds China’s future — will have to be dealt with in the 2010s. Japan will face an existential crisis in the next decade, deciding who it is and what kind of nation it is going to be. The culture of avoiding risk — foreign and domestic — can only be sustained when there are no threats. The threat to domestic well-being has grown. Its economic heft gives it options, of course, but not within the paradigm in which it operated in the past. Its demographic problem is particularly painful, and Japan has no tradition of allowing massive immigration. When it has needed labor it has established colonies in Korea and China. As China shifts its economic pattern, it will need outside investment badly. Japan will still have it to give, and will need labor badly. How this relationship evolves will define Asia in the 2010s.

In 2015, STRATFOR was saying – China has completed its cycle as a high-growth, low-wage country and has entered a new phase that is the new normal. This phase includes much slower growth and an increasingly powerful dictatorship to contain the divergent forces created by slow growth. China will continue to be a major economic force but will not be the dynamic engine of global growth it once was. That role will be taken by a new group of highly dispersed countries we call the Post-China 16, which includes much of Southeast Asia, East Africa and parts of Latin America. China will not be an aggressive military force either. Japan remains the most likely contender for the dominant position in East Asia, both because of its geography and because of its needs as a massive importer.

In 2015, STRATFOR reviewed 2010. STRATFOR said “We predicted China’s weakness too early, but we saw that weakness when others were seeing the emergence of an economy larger than that of the United States.”

Nextbigfuture believes that is an overly generous review of their 2010 prediction.



China Nominal GDP Grew From $2 Trillion in 2005 to Over $12 trillion in 2017


source: tradingeconomics.com

China’s Nominal GDP per Capita Went up Five Times from 2005 to 2017

Some Other Statistics

In 2017, FDI (foreign Direct Investment) into China rose 7.9 percent to reach 878 billion yuan (135 billion U.S. dollars), an all-time high. There was strong investment into high-tech services, which rose 93.2 percent year-on-year to reach 185 billion yuan (over $20 billion).

In 2017, there were 35,652 foreign-funded companies were set up in China, up 27.8 percent from a year before.

FDI into central China registered rapid growth in 2017, with total volume up 22.5 percent year on year to 56.1 billion yuan, faster than the other regions.

2017 Zeihan Talks About Japan Over China

China’s geography is atrocious. Less than one-fifth of its land is habitable. Its flood- and drought-prone north is a flat security free-for-all that has suffered nearly three millennia of incessant internal warfare. Its south is a tropical disease belt. All but one of its rivers are too moody to help with commerce. Its interior is alternatively desert, mountain, tundra, jungle – or some brutal combination thereof. A line of archipelagos parallel its coast, all but preventing military or economic interaction with the wider world.

China as it exists today is only possible because of the global Bretton Woods economic order Washington has upheld since the end of World War II. Simply put, a land-based power with some of the longest supply chains in the world cannot exist as a manufacturing and export powerhouse unless someone with a global navy enables it. That someone has been the United States, who has guaranteed the safety and security of the goods flowing to, from, in and out of Chinese ports, and who has offered largely unfettered market access for decades.

Sure, Xi Jinping is disrupting and reshaping Chinese political corruption to better suit him, but why don’t we talk about how Shinzo Abe was able to get his anti-war, Buddhist coalition partners to support his efforts to expand the role of Japan’s military forces? It is Japan, not China, that boasts the world’s second most capable navy. It is that navy that is second only to the United States in the number of aircraft carriers floated (Japan claims those carriers are only for helicopters but that is, if you’ll forgive the repeat, just some more PR bullshit).

China is still the world’s second largest economy, the biggest by population and its domestic (d)evolutions will certainly cause international ripples. But Beijing will remain constrained by its domestic concerns as its economy remains tied to a disappearing global order it cannot hope to replicate, not even – especially not even – in its own neighborhood. But while the world has eyes on China, mine (and I imagine many of those who attended the Chinese Communist Party’s Congress) will be fixed squarely on Japan.

The Japanese Aircraft carriers that Zeihan refers to are the Izumo and the Hyuga.

In May 2018, Tokyo released portions of a study concluding the Izumo and Kaga could be used to carry U.S. Marine jets assisting in the defense of Japanese soil. Japan is looking to buy F-35Bs. They are appealing because their lift fans would allow them to operate from the shorter civilian airfields of remote Japanese islands, the Tokyo has also studied the cost of modifying the Izumo-class carriers to accommodate up to ten of them at a time. Such modifications would entail heat-resistant paint to the decks, as an F-35B’s vertical lift fans generate such intense heat they could threaten to damage the deck.

So twenty F-35Bs from two tiny carriers. Japan is talking about increasing its 42 F-35A to 142 F-35s with a mix of F-35A and F-35B. F-35B for its jump jet vertical takeoff.

China has two mid-sized carriers and plans to phase in four more by the mid-2020s.

Plus China has fortified islands with 2000 foot runways.

China is starting to mass produce the J-20 stealth fighter and should have at least 200 by 2025.

China has hundreds of dredging ships and can convert many more islands into stationary aircraft and missile staging areas. Two hundred converted islands with airstrips and planes and missiles is not impossible.

There are islands and reefs in the East China Sea off of China and near Okinawa. China could convert those islands easily.

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