China’s Coming Collapse?

A knowledgeable observer has a dim forecast.

China Flag and Skyline

Bob Davis, who is wrapping up a four-year stint covering the Chinese economy for the Wall Street Journal, offers a dim forecast (“The End of China’s Economic Miracle? Debt and corruption are hobbling the Asian giant.“) on his way out.

When I arrived, China’s GDP was growing at nearly 10% a year, as it had been for almost 30 years—a feat unmatched in modern economic history. But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast.

My own reporting suggests that we are witnessing the end of the Chinese economic miracle. We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending. The construction crane isn’t necessarily a symbol of economic vitality; it can also be a symbol of an economy run amok.

Most of the Chinese cities I visited are ringed by vast, empty apartment complexes whose outlines are visible at night only by the blinking lights on their top floors. I was particularly aware of this on trips to the so-called third- and fourth-tier cities—the 200 or so cities with populations ranging from 500,000 to several million, which Westerners rarely visit but which account for 70% of China’s residential property sales.

[…]

For the past 20 years, real estate has been a major driver of Chinese economic growth. In the late 1990s, the party finally allowed urban Chinese to own their own homes, and the economy soared. People poured their life savings into real estate. Related industries like steel, glass and home electronics grew until real estate accounted for one-fourth of China’s GDP, maybe more.

Debt paid for the boom, including borrowing by governments, developers and all manner of industries. This summer, the International Monetary Fund noted that over the past 50 years, only four countries have experienced as rapid a buildup of debt as China during the past five years. All four—Brazil, Ireland, Spain and Sweden—faced banking crises within three years of their supercharged credit growth.

China followed Japan and South Korea in using exports to pull itself out of poverty. But China’s immense scale has now become a limitation. As the world’s largest exporter, how much more growth can it count on from trade with the U.S. and especially Europe? Shift the economy toward innovation? That is the mantra of every advanced economy, but China’s rivals have a big advantage: Their societies encourage free thought and idiosyncratic beliefs.

When I talked to Chinese college students, I would ask them about their plans. Why, I wondered, in an economy with seemingly limitless potential, did so few choose to become entrepreneurs? According to researchers in the U.S. and China, engineering students at Stanford were seven times as likely as those at the most elite Chinese universities to join startups.

Bad news for China is bad news for the region and bad news for the United States. But Davis is likely right.

What the Chinese economy has done since Mao died in 1976 and Deng Xiaoping finally consolidated power in 1978 is nothing short of remarkable. That they sustained such rapid growth for almost four decades is unprecedented. But it wasn’t going to last forever. And they cost of progress has been crippling pollution and, because of the One Child policy, a demographic nightmare.

Davis is right that political repression puts China at a strategic disadvantage against even other Asian competitors. But the CCP has, rightly, worried that too much freedom could not only topple the current governmental structure but the cohesion of the society itself. That’s what happened when Mikhail Gorbachev tried Glasnost, after all. They’ve therefore tried to open the system gradually, mostly in terms of economic freedom, and only do so where absolutely necessary. Right now, they’re in something of a Catch-22: they need more freedom to keep innovation going and therefore save the society from the effects of economic regression. But that freedom could destroy the country, too.

 

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Dave Schuler says:

    Industrialization is not particularly remarkable. Other countries did it before the Chinese, notably the Soviet Union, which received many of the same reactions three quarters of a century ago that China has received in the last couple of decades.

    What the Soviets and now the Chinese did was move relatively unproductive labor from agricultural production to industrial production.

    The great accomplishment of the Chinese authorities was that they managed to do that while increasing agricultural production, something the Soviets did not do.

    Not long ago I read an article, James, that directly contradicted the article you cite. I’ll see if I can’t dredge up the link for you.

    People have been predicting imminent Chinese collapse for years and it hasn’t worked out that way so I wouldn’t count them out just yet. I think China’s odds are worse than they were, say, a decade ago but the authorities there may still pull things out.

    I attribute the deterioration of China’s odds (in my view) to the failure of the authorities to address China’s most pressing problems. Does that sound like anybody you know?

  2. The Coming Collapse of China is a book by Gordon G. Chang, published in 2001, in which he argues that the Communist Party of China is the root cause of many of the country’s problems.[1]

    In the introduction of his book, Gordon G. Chang, an American lawyer, predicts the following scenario:

    The end of the modern Chinese state is near. The People’s Republic has five years, perhaps ten, before it falls. This book tells why.[2]

    Based on the perceived inefficiency of state-run enterprises and the inability of the Communist Party of China to build an open democratic society, Chang argues that the hidden non-performing loans of the “Big Four” Chinese State banks would likely bring down China’s financial system and its communist government along with the entire country.

    […]

    In an article entitled “The Coming Collapse of China: 2012 Edition”, published by the Foreign Policy magazine website, Gordon C. Chang admitted that his prediction was wrong, arguing that he was off only by one year: “Instead of 2011, the mighty communist party of China will fall in 2012. Bet on it.”[5]

    http://en.wikipedia.org/wiki/The_Coming_Collapse_of_China

    In other news, it’s Friday, so here’s yet another “China’s going to collapse” story.

  3. Hal_10000 says:

    In other news, it’s Friday, so here’s yet another “China’s going to collapse” story.

    I’m reminded of a story Bill James told. He said there was a guy in his school who drank like a fish and drove like a maniac. Everyone predicted he’d die in a car crash by 25. Boy, where they wrong. He didn’t die in a car crash until he was 30.

    A lot of predictions don’t happen on time. That doesn’t necessarily mean the fundamentals are wrong. Just because China hasn’t crashed *yet* doesn’t mean it won’t. As James notes, China is about to get older, faster than any nation in history. They are also running into hard limits on industrialization. They’ve picked the low-hanging fruit of modernizing their cities. It’s going to be much harder to raise up the far-flung rural areas. If you break China up into sub-regions, as Hans Rosling pointed out, you’ll find parts of China are extremely poor while others have near modern levels of wealth.

    It also should be pointed out that China’s growth looks spectacular because the country was so dirt poor after Maoism. It’s much easier to grow your economy by 10% of nothing than 10% of everything. Greece is supposedly a catastrophe while China is a miracle, but Greek GDP is twice that of China, quality of living is far better, etc.

  4. Ron Beasley says:

    They are also going to be forced to address their pollution problems. Major airports are often shut down several days a month and children are getting lung cancer.

  5. michael reynolds says:

    @Ron Beasley:

    What? You want to regulate their economy that way? Don’t you know environmental regulations are economically destructive? Don’t you want Chinese kids to have a future? Those that don’t die of lung cancer, I mean?

  6. James Joyner says:

    @Dave Schuler:

    I attribute the deterioration of China’s odds (in my view) to the failure of the authorities to address China’s most pressing problems. Does that sound like anybody you know?

    Presuming you’re talking about us, I had the exact same notion when I saw the piece.

    In terms of the rest of your comment, as I hope I made clear in the post, I’m hoping that the pessimistic analysis, which I share, is wrong. For both humanitarian and strategic reasons, I very much hope China’s 1.3 billion people continue to be in a growing, not collapsing, economy and that their country continues to be stable. I just think there are some pretty daunting obstacles.

    @Hal_10000:

    If you break China up into sub-regions, as Hans Rosling pointed out, you’ll find parts of China are extremely poor while others have near modern levels of wealth.

    Davis makes that argument in the cited article as well. I’d already quoted more of if than I prefer.

    @michael reynolds: While I’m leery of environmental, and other regulations, I don’t think they’re unnecessary in the abstract. I’m generally unwilling to, say, put an industry out of business over the fate of the snail darter. But I’m very much in favor of clean air and water on the basis that this is our habitat and acknowledge that the incentives of the market are for the short, not long, term.

  7. michael reynolds says:

    @James Joyner:
    I entirely agree re: snail darters and their ilk. Ideally we’d have some way of weighting these environmental threats against economic priorities. That would require rational politicians willing to do hard things that may get them pilloried by this or that PAC or special interest group. So that’s not happening.

  8. anjin-san says:

    China’s Coming Collapse?

    Hmm. Well, ‘Coming Collapse” stories are a good way to garner eyeballs and further an agenda. For example, conservatives have been telling us how socialist European health care systems are “on the brink of collapse” for 35 years now, so I’m not sure how seriously they should be taken.

  9. MarkedMan says:

    The real estate issue is much more complex then described in the excerpt, albeit that doesn’t mean there won’t be serious problems. For instance, here in Shanghai there are a lot of empty flats, and I mean, standpipe, concrete floors and walls, bare wires terminating in wire nuts. And this makes perfect sense for the owners. First, there is no property tax so the cost of keeping something empty is minimal. Second, if you were to outfit and rent it and the tenants stopes paying rent, it could be very difficult to evict. Third, in their entire lives, real estate has only gone up in value. Fourth, if middle class parents have a son it is tradition that they supply him and his bride a housing unit. For a lot of people it makes sense to take out a mortgage when the son is born because with 25-35 more years of accumulated price rise., it’s a sound investment.

  10. Davebo says:

    @James Joyner:

    Bob Davis speaks neither Mandarin or Cantonese. But yeah, I’m certain he has his finger on the pulse of China’s economy.

    He has after all been smartly observing it from Beijing as people around him made senseless sounds for 3 years or so.

    He’s also an “expert” on South America.

  11. James Joyner says:

    @Davebo: I’m not sure I understand this argument. Davis is a journalist, not an economist, so he’s likely not an “expert” in the way that an economist specializing in China would be. But he’s spent years covering economic issues for the WSJ and presumably spends a lot of time interviewing experts, including economists, bankers, finance ministry officials, and the like. So he’s surely qualified to comment on the subject.

    Nor is it obvious in the slightest why being able to speak to the Chinese man in the street would greatly aid him in his analysis. Presumably, almost everyone who is an expert on the subject speaks pretty good English. Even those who aren’t can be filtered through a professional interpreter.

  12. Tillman says:

    @Hal_10000: I agree with everything you said, but Greek GDP is not twice that of China. No sir.

    Greek GDP per capita (PPP) is, however, if that’s what you meant.

  13. Grewgills says:

    But growth is now decelerating toward 7%.

    What Western nation wouldn’t be thrilled with 7% growth?

  14. James Joyner says:

    @Grewgills:

    What Western nation wouldn’t be thrilled with 7% growth?

    But China needs 10% just to stay even because of population trends. It’s unsustainable but necessary. That’s the reason all these “China’s coming collapse” pieces keep coming out.

  15. Ol' Nat says:

    I’m generally unwilling to, say, put an industry out of business over the fate of the snail darter.

    This may be off-topic, but it seems to me that the environment is suffering pretty heavily all around. That industry may be responsible for more than just a little fish.

    The collapse of the world’s fisheries will cause both countries a bit of pain.

  16. DC Loser says:

    It’s worrying, but I have a feeling they’ll muddle along and be helped by us since it’s not in anyone’s interest to see China’s economy tank. As far as predictions about China’s collapse, this isn’t the first one.

    http://www.amazon.com/Coming-Collapse-China-Gordon-Chang/dp/0812977564

  17. Modulo Myself says:

    Industrialization has always brought with it predictions of imminent doom. It’s terrible, short-sighted, and wasteful. Look at how many people going into the 20th century believed in Marxism; look at how many more who hated Marxism feared that communism’s triumph was inevitable. I doubt China will turn out very differently than any other industrialized country.

  18. Tyrell says:

    Well, there goes that crazy Cljmate change deal that Obama signed with the Chinese leaders. Evidently Air Force One was short on oxygen that day. Any way, anyone who trusts the Chinese to live up to any deals is easy prey on the used car lots.
    See article by Andrea Cohen:
    http://www.bostonherald.com/news_opinion/columnists/adriana_cohen/2014/11/adriana_cohen_climate_deal_with_china_waste_of_time

  19. grumpy realist says:

    @James Joyner: Based on my experience in Japan, I’d go with report from the person who is fluent in the native language over that from he who isn’t. Getting stuff second-hand always slants things.

    You get a REALLY different view of how a system works when you’re working with the mono-linguists rather than the bilinguists. Especially if you work side-by-side with them, or go off drinking in bars with them.

    1