The Coming Collapse of the Chinese Economy

By Gordon G. Chang

Can Beijing rescue the Chinese economy?

No one would have asked this question in September.  Just a few short months ago, analysts were competing to give us the earliest date that China, with its double-digit growth, would overtake America to become the world’s largest economy.

Now, the global narrative has changed as we see signs the Chinese economy is faltering.  There is, for example, overinvestment in infrastructure and industrial capacity, an accumulation of local government debt, a consequent buildup of questionable loans in the banking system, a slowing of growth, a precarious property bubble, and persistent inflation.

And the worst sign of all?  In November and December, China’s foreign reserves decreased by $92.7 billion, the result of Chinese businesses and people smuggling money out of the country.

Many analysts believe that, despite their severity, these problems are temporary because the Chinese economy is in a supercycle upward.  Yes, China was in a three-decade upward supercycle for three principal reasons.  First, there were Deng Xiaoping’s transformational “reform and opening up” policies.  Second, Deng’s era of change coincided with the end of the Cold War and the elimination of political barriers to international commerce.  Third, all of this was taking place while China was benefiting from its “demographic dividend,” an extraordinary bulge in the workforce.

Yet this “sweet spot” is over, because the conditions that created it either no longer exist or are disappearing fast.  First, China is no longer reforming.  Hu Jintao, the current leader, is presiding over an era marked by, on balance, the reversal of reform.  He has, for instance, favored state enterprises at the expense of domestic entrepreneurs and tried to exclude foreign investors.  As they say in Beijing, “the Communist Party is now the economy.”

Second, China’s exports boomed in the post-Cold War period when countries wanted to integrate China into the international system and were indulgent, tolerating its mercantilist policies.  But we have left that time of uninterrupted growth, and nations have in fact lost patience with Beijing.  A year ago, it would have been inconceivable that Pacific Basin countries would launch a major trade round that excluded China, but that is exactly what happened last November when President Obama announced the Trans-Pacific Partnership negotiations.  The terms of the deal will include provisions, such as restrictions on state enterprises, designed to keep the Chinese out.

Third, China, which during the reform era had one of the best demographic profiles of any nation, will soon have one of the worst.  Perhaps as early as next year the absolute size of the workforce will first peak and then fall.  Soon, one worker will support two parents and four grandparents.

So China’s economy is entering a down supercycle.  It is in this adverse context—not the favorable one we have seen since the beginning of reform in 1978—that Chinese leaders will have to act.  In other words, they will no longer be propelled by trends; going forward, they will have to succeed in spite of them.

In order to succeed, Beijing will have to rebalance the economy away from investment and towards personal consumption.  In no country does consumer spending play a smaller role in the economy.  Low consumption is the inevitable result of China’s growth model, not merely a remediable feature of it, and consumption’s role will not grow significantly until Beijing takes inherently risky steps to change the model.

No one in the Chinese capital, however, is willing to implement the decisions that are necessary to put the economy on a sustainable basis.  Everyone knows what to do; they’re just not doing it.

Why?  China is in the midst of an historic political transition that could last for years.  Until new leaders get settled in, no one will take the painful measures that everyone understands are necessary.

But by then, it will be too late.

High growth in China for decades has masked structural flaws.  Now that growth is slowing, we are beginning to see fundamental problems.  But just as this is happening, the political system is losing its ability to act.

So can Beijing officials rescue the Chinese economy?

The answer to the question is they probably cannot, but worse, they’re not even trying.


Gordon G. Chang is the author of The Coming Collapse of China and a columnist at  Follow him on Twitter @GordonGChang.