TOPSHOT - A demonstrator wearing a mask painted with the colours of the flag of East Turkestan and a hand bearing the colours of the Chinese flag attends a protest of supporters of the mostly Muslim Uighur minority and Turkish nationalists to denounce China's treatment of ethnic Uighur Muslims during a deadly riot in July 2009 in Urumqi, in front of the Chinese consulate in Istanbul, on July 5, 2018. - Nearly 200 people died during a series of violent riots that broke out on July 5, 2009 over several days in Urumqi, the capital city of the Xinjiang Uyghur Autonomous Region, in northwestern China, between Uyghurs and Han people. (Photo by OZAN KOSE / AFP) (Photo credit should read OZAN KOSE/AFP/Getty Images)

2/ Chinese economy is structurally distorted towards

a) running a massive trade surplus

b) which is achieved by keeping wages, consumption and imports lower than what productivity warrants

c) with the resulting savings fueling debt driven real estate & infrastructure spending.

3/ The factors a, b, c above also feed into each other and hence reinforce each other which is why it becomes “structural distortion”, by which I mean that this pattern is very hard to reverse, as @michaelxpettis often points out.

Consider debt fueled real estate spending.

4/ Real estate investment in China is the cause and consequence (feedback loop!) of a massive bubble of ever-rising apartment prices.

The average Chinese worker has seen a bigger and bigger proportion of their rising paycheck going to mortgage payments.

5/ This suppresses consumption as well as fertility – marriages get postponed until a worker can afford to buy an apartment.

The resulting lower consumption means China becomes even more dependent on exports (other people’s consumption).

6/ The export surpluses become reserves and enter the domestic banking system which becomes swollen when the multiplier effect kicks in to produce loans for local government led infrastructure spending. Chinese cities sport fancy stadiums, museums, music halls and so on.

7/ China has the highest proportion of bank assets as a percentage of GDP (600%) of any major economy, and much of those assets have financed unproductive infrastructure or ever more real estate projects.

Now the Chinese central government is worried about extreme debt …

8/ …taken on by local governments and real estate companies (that swollen debt is the other side of swollen bank assets).

So many of Chinese jobs are tied to construction of housing and infrastructure. When the central government cracks down on debt, these jobs suffer.

9/ Hence the “grim outlook” for jobs.

The lesson is that structural distortion in an economy becomes entrenched and jobs come to depend on that distortion.

The US has a mirror distortion of what I call “token distribution jobs”.

Hence my grim outlook for the global economy.