Seven Grey Swans a Swimmin’ in 2025: #4 The China Wild Card

“The Chinese use two brush strokes to write the word “crisis.” One brush stroke stands for danger; the other for opportunity.”

–Attributed to both JFK and Richard Nixon

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December 26, 2024— Pundits have long predicted some kind of crisis between China and the United States.

It’s often pitted as one country’s ascension that results in some kind of test against the existing power. Much like how the United States was on the rise as the British Empire was seeing the sunset after all. Or how Britain rose against the French before that.

It’s certainly true that China could become the leading global economy at some point in the next few decades. It sprinted to the #2 position from a nearly non-existent economy when President Nixon first visited China in 1972.

However, history is also littered with those who came at the king—and missed. Examples include the rise of Germany in the late 19th century, the USSR in the 20th, and perhaps China in the 21st.

But even if China doesn’t become the world’s new superpower, it could still look to flex its power by destabilizing the existing one.

Grey Swan #4: The China Wild Card

There are plenty of reasons why China could trigger a Grey Swan event in financial markets in 2025.

For starters, 2025 will mark two years since they ended their draconian Covid-era lockdowns. While economic analysts predicted a surge of growth, the opposite has occurred.

China’s economy still grows, at least on paper. But that’s what happens when you include government spending on GDP. China’s stimulus announcements made in late 2024 suggest a weakening economy.

Since 2020, China has moved to shore up its real estate market. That includes addressing the failures of developers such as Evergrande. All told, real estate investment peaked at 13.9% of GDP in 2020, and fell to 9.6% at the end of 2023.

As our portfolio director Andrew Packer noted back in August:

Perhaps not surprisingly to the student of history, China’s attempt to grow its own middle class has fizzled out.

In 2023, China was supposed to see massive growth as they ended draconian Covid-era lockdown policies.

They did grow by 5.2% – it’s amazing how much GDP growth you can have thanks to the fact that government spending is added to GDP, not subtracted. But it was far less than expectations for 6-8% growth.

More importantly, China’s neo-mercantilist policies have soured with the investment community.

Companies have spent billions to expand manufacturing outside of China, whether still far away, or with near-shoring in Mexico, or even re-shoring for America’s semiconductor manufacturing renaissance.

Perhaps it’s because, despite China’s massive economic growth over the past few decades, there’s very little individual freedom. Or, perhaps, it’s simply because there’s no good translation of The Wealth of Nations.

Clearly, China may try to distract its population from a worsening condition with some kind of adventure abroad.

That could mean anything from trying to destabilize Western nations, possibly in conjunction with the BRICS members … to an outright invasion of Taiwan.

Plus, how China reacts to new tariffs from the incoming Trump administration could also lead to significant shortages in key materials, such as rare earth elements (REEs) that could hobble America’s technological advances.

However, for most Americans, the real “China threat” is America’s addiction and dependence to cheap labor and cheap goods.

America’s reliance on cheap Chinese imports and labor has left us vulnerable to China’s economic instability.

If China’s economy continues to falter, the days of cheap imports could be over, leading to higher prices for American consumers across a wide range of goods.

Everything from electronics to clothing could become significantly more expensive, putting pressure on household budgets.

Supply chain disruptions could become more frequent and severe, affecting everything from electronics to pharmaceuticals. This could lead to shortages of critical goods and materials, impacting both consumers and businesses.

American companies heavily invested in China could face significant losses, potentially leading to job cuts and economic instability at home.

Many U.S. corporations have bet big on the Chinese market, and a downturn there could hit their bottom lines hard.

The global economic ripple effects could trigger a worldwide recession, with America caught in the crossfire. Given China’s role as the world’s second-largest economy, its problems could quickly become everyone’s problems.

The China problem is real, urgent, and not going away. How we respond in the coming years will determine not just the future of U.S.-China relations but the future of the global order itself. The stakes couldn’t be higher.

If our relations with China continue to sour, there’s a very real chance we’ll see “sticky” inflation. That could tank today’s ebullient financial markets and cause a selloff that would affect all assets, even safe-haven plays like gold.

For now, this is a situation to monitor closely. China’s weakening market may also pose an opportunity to rethink fairer trade deals, end the theft of intellectual property, and move forward in a more constructive manner.

Regards,

Addison Wiggin,
Grey Swan

P.S.  China’s 2024 stimulus measures came in just under $1.1 trillion (so far). That’s about 6% of the country’s GDP. Meanwhile, their reported GDP growth for 2024 was about 5%.

In other words, China is already buying economic growth at a high price, paying more than what it’s likely to get as a benefit. Worsening economic conditions in China could tip over to the rest of the world in 2025, and we wouldn’t be surprised to see other countries look to undertake stimulus measures either.

As Grey Swan Investment Fraternity contributor John Robb notes, a failing centralized economy may cause the party leadership to lash out at Taiwan and deliberately draw the U.S. into a hot war.

Your thoughts on the top Grey Swan events of 2025 are welcome here: addison@greyswanfraternity.com.