This article was published by the McAlvany Intelligence Advisor on Wednesday, October 23, 2019: 

Despite President Trump’s urging that companies leave China, backed by tariffs and threats of more tariffs, companies with operations in China have been reluctant to leave. If Harry Dent is correct, the present trickle could turn into a flood.

Dent carved out a niche for himself as an iconoclast when he learned that the Keynesian theories he was taught in college had few answers to how a free economy, left to itself, would solve most of society’s economy problems. He developed the “spending wave” theory that is simplicity itself: consumer spending peaks near age 50, and declines from there. By following the various cohorts through time and predicting their future spending behaviors, Dent made himself famous, if not appreciated.

He recently turned his attention to China:

Anyone who has listened to me in the past decade knows that I think China’s going to take the greatest economic fall of any major country.

 

They’re the only emerging country that has continually declining demographics. The top-down Chinese mafia-like government has overbuilt everything (decades ahead) in the name of job growth in cities to leverage steroid-like GDP growth.

 

But I’ve also considered another proven principle: it’s younger people that move and migrate, but they also revolt and drive unrest, much more than older people….

 

So, where does that leave the cities of China: with about 150 million-plus younger migrant workers that’re [angry], with two-thirds of men 18 to 25 unmarried (or three-fourths by some estimates) and unlikely to be, as they can’t afford housing.

 

When this so-called “miracle” of Chinese growth and urbanization finally falls apart between 2019 and 2020, these men will revolt.

 

The next Tiananmen Square protests will come, and they will be much greater and more powerful. With workers, not students, rioting in much higher numbers from much greater desperation!

 

I want to see what the economists that constantly praise the new Chinese model of state-driven capitalism say then….

In July, CNBC reported that just 50 companies had moved some of their manufacturing facilities out of China in response to President Trump’s threats and tariff wars.

At the time, it was reported that personal computer makers HP and Dell were considering moving up to 30 percent of their notebook production out of China to Southeast Asia. Others, including Apple and Nintendo, are accelerating their plans to exit China in favor of Vietnam and Thailand.

As the pressure of mounting tariffs and increasing Chinese reluctance to strike a comprehensive deal with the Trump administration mounts, Fitbit, Samsung, GoPro, and Crocs are joining the exodus. Ron Kisling, chief financial officer at Fitbit, said, “In 2018, in response to the ongoing threat of tariffs, we began exploring potential alternatives to China. As a result of these explorations, we have made changes to our supply chain and manufacturing operations, and have additional changes underway. Based on these changes, we expect that effectively all trackers and smartwatches, starting in January 2020, will not be of Chinese origin.”

GoPro has moved even faster. CFO Brian McGee said his company was “moving most of our US-bound camera production out of China,” with its exodus to be complete by the fall of 2019.

Other companies, such as iRobot, LG Electronics, and Sony, are making similar moves to Vietnam and Thailand.

Furniture maker Lovesac, headquartered in Stamford, Connecticut, is moving 75 percent of its production out of China because of the continuing trade wars. Added CEO Shawn Nelson, “If the tariff doesn’t go away, we will cease all production in China.”

Southeast Asian countries such as India are making the transition easier and more attractive financially. Aside from offering a workforce with wages at fractions of Chinese wages, the finance ministry just announced it was slashing corporate tax rates by more than 40 percent (from 29% to 17%) starting October 1. Further cuts not only in taxes but in regulations are anticipated as India eyes the possibility of enticing companies like Apple to move some of its operations from China. India’s Finance Minister Nirmala Sitharaman said, “If a company like Apple and its entire ecosystem were to move to India, it would have a massive [impact].” He is hosting a visit by US Treasury Secretary Steve Mnuchin next month to promote India as a better alternative for those companies exiting China.

Nevertheless, thousands of companies with presence in China are staying put. The cost of disrupting and replacing the networks and supply chains is, for the present at least, just too costly.

The decision to exit is being made easier, but most remain in place, despite the apparent advantages. First, wages in China are now twice as high as in Vietnam, and several times higher than in India. Second is the increasing expectation that the trade war isn’t likely to end anytime soon. Phase One just announced by President Trump hasn’t been fleshed out, and isn’t expected to be signed anytime soon, thanks to Chinese stalling and demands for additional talks before doing so.

Decisions to leave the mainland are even showing up in the “official” Chinese reports on its economy. Unofficially the Chinese economy is stagnant, and unrest among its citizens is increasing.

But if Dent is right (with the Hong Kong protests just a foretaste of unhappiness on the mainland), that reluctance to move out could vanish, and the present trickle could turn into a flood.

—————————

Sources:

Social Unrest in China, by Harry Dent

Background on Harry Dent

Background on Dent’s “spending wave” theory

The Wall Street JournalU.S. Companies Preparing for Long-Term ‘Confrontational Relationship’ With China

ABC NewsFitbit to move production out of China because of ‘ongoing threat of tariffs’

CNBCFitbit says it will shift manufacturing out of China to avoid tariffs

Hartford CourantStamford-based furniture company Lovesac prepares to move 75% of production out of China by 2020 as trade war intensifies

Entrepreneur2 Reasons How US-China Business Tension Would Benefit Indian Economy

Financial TimesSamsung’s departure is new blow to Chinese manufacturing

CNBCMore than 50 companies reportedly pull production out of China due to trade war

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