What just happened: Storm clouds loom for China’s economy

Washington Post has published an opinion piece arguing that the latest news from China is ominous. A range of indicators suggests that Beijing is facing economic headwinds. Growth has failed to meet expectations. Foreign investment is sagging. The crucial housing market is soft. Caliber.Az reprints the article.

Companies and government institutions are struggling under mounds of debt. On Thursday, the giant property developer China Evergrande filed for bankruptcy. On top of all this comes news that the economy has entered deflation — raising fears of a downward spiral of the type that crippled mighty Japan in the 1990s.

What does it all mean? We asked our columnists to weigh in.

Sebastian Mallaby: Demographics are destiny

The deep cause of China’s economic slowdown — and the strongest reason to believe that it is lasting — is its demographic collapse. Last year the country’s population fell for the first time since 1961, a landmark that had not been expected until 2029 or later. From here on, China’s demographic decline will accelerate: The United Nations projects that the country’s head count will plummet from today’s 1.4 billion to below 800 million by century’s end. You have to go back to the plagues and famines of the late medieval period to find a loss of population so severe.

China is following the pattern of other high-saving, high-investment economies in Northeast Asia. Economic systems that suppress consumption and living standards eventually face a comeuppance: They create legions of stressed young couples who don’t want to make babies.

Accordingly, China is one of the world’s most expensive places to raise a family, a fact that has driven fertility down to an all-time low of 1.2 children per woman. In 2021, the government adopted a pronatalist “three-child policy,” but fertility is one thing that central planners don’t control.

But China’s rock-bottom fertility also reflects distinctly Chinese characteristics — specifically, the authoritarianism of the Communist Party. Because of selective abortion and neglect of baby girls, China has around 30 million fewer females than males. And because China experiences steady net outward migration, it cannot fix its problem by attracting foreigners. Mobile and aspirational people tend to shun aggressively authoritarian regimes.

The rapid fall in China’s population delivers a double punch to the country’s prospects. Fewer workers mean less growth: Over the next 75 years, China’s working-age population will contract even faster than its general population. At the same time, the graying of the population will fuel pressure for more welfare spending — witness this year’s street protests against medical insurance reforms by tens of thousands of seniors in Wuhan and Dalian.

Even with its population falling below 800 million by 2100, China is projected to be the world’s second-most-populous country, with twice as many people as the United States. But China is going to change substantially. It will play less of a role as the world’s brash insurgent, gobbling up export markets and clamouring to buy companies and real estate. It will be more the grumpy incumbent, worried about its creaking welfare system and stubbornly low growth.

Catherine Rampell: Discontent among the young

For generations, the Chinese Communist Party has held onto power partly through an implicit bargain with its citizenry: Sacrifice your freedoms, and in exchange we’ll guarantee ever-rising living standards.

That deal has not held up for today’s youths.

Until quite recently, China’s young people seemed poised to take on the world — and many of them appeared to believe they would. They’ve shown a streak of hyper-nationalism, stoked by the country’s leadership and reinforced by China’s growing economic and geopolitical strength. China’s Gen Z came of age, after all, in the wake of the country’s accession to the World Trade Organization and amid a rapid rise in incomes. China’s resilience in the wake of the financial crisis, particularly relative to the sluggish recovery across most of the West, suggested China and its citizens had nowhere to go but up. Political dysfunction in many of those same Western democracies, expertly exploited by Chinese propaganda, reinforced this perception, too.

Chinese youths are also more educated than ever before, with a record 11.6 million estimated to graduate college this year. This is an incredible achievement for a country where, as recently as 2000, roughly 1 in 10 adults was not considered literate.

But the post-covid economic slowdown has caused job opportunities, particularly those in tech and other fields coveted by new grads, to dry up.

Youth unemployment has been climbing all year, with the jobless rate for those ages 16 to 24 hitting an all-time high of 21.3 per cent in June. Then this week, the government suspended the data series altogether. Young people who do find work are often subject to gruelling, 72-hour workweeks and burnout. A rash of media stories report that many 20-somethings are dropping their careers to become “full-time children,” meaning they’re exiting the formal job market and receiving a stipend from their parents to focus on chores and other filial duties.

Rather than continue to dangle ever-rising wealth and employment prospects before Gen Z, or even express much empathy for their dashed hopes, Chinese leadership has basically told young people to stop whining and ratchet down their expectations.

President Xi Jinping has said young people must learn to “eat bitterness” (an idiom that roughly means to toughen up by enduring hardship). Today’s youths, leaders say, are not too good for manual labour or moving to the countryside — experiences Xi and his generation once had to endure.

Perhaps it’s unsurprising that the end of the country’s draconian lockdowns coincided with a surge in emigration. Reports of disillusionment among young people are now common; the question ahead is whether any resulting frustration and anger will be turned inward or outward.

Lawrence H. Summers: China’s economy is finally hitting a wall

There can now be little doubt that just as the conventional wisdom way overstated the economic prospects of Russia in 1960 and Japan in 1990, so have China’s prospects been greatly exaggerated in this decade.

Indeed, I think there is a good chance that, measured at market exchange rates, U.S. gross domestic product will exceed China’s for the remainder of this decade.

As with Russia and Japan, this reflects the fact that countries whose growth is driven by super-high capital investment in manufacturing eventually hit a wall. As in those cases, it reflects demographic disaster, with the number of births in China now less than half of what they were seven years ago and marriage rates collapsing.

On top of that, China’s export growth engine is stalled by a lack of global willingness to accept more of its production, and its infrastructure and real estate sectors still must work off the massive overbuilding of recent years.

In Russia and Japan, tremendous technology — exemplified by Sputnik in the case of the Soviet Union and electronics leadership in Japan — was not enough to prevent relative economic decline.

The same will likely be true in China, even if it were to end its corrosive political interference with top companies. What does all this mean for the United States? No one should conclude that we can be complacent about the Chinese geopolitical challenge. Indeed, nations that see the economic route to glory foreclosed can become irrational and dangerous.

It is not Xi’s intention to wish us well; he does not seek to be slotted into the global order on our terms or desire to maintain current balances of power. Our buildup of alliances needs to be complemented by increased national security spending and firm signals that aggression will not be tolerated.

At the same time, however, we must be careful that valid security concerns do not lead to economic policies that provoke the very kinds of aggression that worry us most.

Policies that limit commerce with China are surely necessary in some areas on national security grounds. But contrary to what is often asserted by advocates, they exacerbate inflation, reduce the purchasing power of middle-class incomes and interfere with American competitiveness.

To build on national security adviser Jake Sullivan’s recent formulation, if we’re going to fence off some “yards” of our economy from China, it is at least as important going forward that yards be small as it is that the fences be high.

Max Boot: Be careful what you wish for

For the past decade, Americans have been transfixed by the spectre of a rising China. We’ve worried that the Chinese economy would destroy American jobs and that the Chinese military would draw the United States into a war over Taiwan. Now comes evidence that China’s economy is stagnating — and those problems are unlikely to go away, because China’s population is rapidly aging and declining. The “Chinese century” might be over before it has begun.

That should be good news, right? Not so fast.

China has been a chief driver of the global economy for the past two decades. Imports of Chinese goods keep prices low for U.S. consumers and China’s purchases of U.S. Treasury bills keep interest rates lower than they would otherwise be for U.S. home buyers.

The loss of jobs to China ended around 2010, while the creation of new jobs linked to China trade continues. U.S. exports to China amounted to $192 billion in goods and services and supported more than a million U.S. jobs in 2021. Little wonder that Treasury Secretary Janet L. Yellen warns that China’s current economic slowdown is a “risk factor” for the U.S. economy.

There is geopolitical risk as well. Although conventional wisdom dating to the time of Thucydides has it that we should fear revisionist powers on the rise, the historical record indicates that declining revisionist powers might be even more dangerous.

Germany, notes Hal Brands of Johns Hopkins University, launched both World War I and World War II in a mood of “deep pessimism caused by the fear of impending decline.” More recently, Russia, a country in a demographic death spiral, launched an invasion of Ukraine in the hope of reclaiming lost imperial glory.

China’s economic slowdown could cause Xi to pursue more authoritarian and militaristic policies — even an invasion of Taiwan — to contain rising domestic discontent and channel popular anger against external foes.

Paul Heer, a former U.S. national intelligence officer for East Asia, warns that U.S. export-control policies and tariffs are creating a convenient scapegoat, allowing Xi to blame the United States for China’s economic woes. “We should take no comfort in China’s economic slowdown,” Heer told me, “because it will probably increase domestic tensions and problems inside China, which has never been a good thing for the U.S., or for U.S.-China relations.”

In short, evidence of China’s economic woes should be filed under “be careful what you wish for.” A declining China might be more dangerous than a rising China.

Josh Rogin: A great economy is simply not Xi’s top priority

China’s economic problems should not come as a surprise. They’re merely the latest (and most dramatic) evidence of trends that have been building for years.

This is no accident. For years now, President Xi has been prioritizing political control and social stability over economic development. Before, during and after the covid-19 pandemic, Xi has made decisions based on what’s good for him, the Chinese Communist Party and China’s national security — in that order. Maximizing economic growth clearly comes somewhere lower on the list.

“What’s really going on here is that people are realizing late that China’s growth has been declining since 2011 and is going to continue to decline,” said Derek Scissors, Asia economist and senior fellow at the American Enterprise Institute. “Xi is willing to pay high economic costs for the sake of political control, social stability and the ability to influence other countries.”

Beijing claimed only 6.3 per cent growth in the second quarter compared with a year earlier, which was slower than many Wall Street analysts expected. Western economists see obvious remedies: Beijing should cut interest rates, weaken its own currency and reinflate the real estate bubble. Yet Xi doesn’t seem interested in doing any of that.

Outwardly, Beijing has embarked on an economic charm offensive, inviting world leaders and claiming China is “open for business.” But internally, Xi’s government is restricting the release of basic economic data that investors depend on, while raiding foreign businesses and arresting so many foreigners that the U.S. government is warning Americans it’s not safe to travel there. No wonder foreign investment is drying up.

Xi has crushed China’s own innovation machine, imposing party control over the technology, education, gaming and other sectors. China’s expanded use of economic coercion abroad has alienated countries, including Australia, Lithuania, Italy, South Korea and Taiwan, to name just a few. No wonder China’s trade numbers are down.

Again, these are not new developments. Xi’s tech crackdown began in 2019. Debt woes have been mounting since 2008. Demographic problems are the result of policies set in the 1970s.

China’s economic growth will continue to slow. The Chinese Communist Party undoubtedly wants a good economy. It just wants power more.

David Ignatius: Peril for Taiwan

However much we might enjoy China’s economic troubles, we shouldn’t assume that what’s bad for them is necessarily good for the United States and its allies. A falling China presents its own set of problems.

My biggest worry is that decline will give Xi even more reason to play the nationalist card. If he can’t give the Chinese people “common prosperity,” maybe he will be tempted to give them Taiwan.

A June report by the Council on Foreign Relations underlined how Xi has tied China’s unification with Taiwan to “rejuvenation of the Chinese nation.” A 2022 white paper called it “indispensable” and “an essential step” for China’s restoration. Xi said in a March 2023 speech to the National People’s Congress that reunification “is the essence of national rejuvenation.”

The council’s task force warned: “As China’s economic growth has slowed under Xi, he has increasingly turned to nationalism to justify the CCP’s monopoly on power. With a further downturn, he could turn to the Taiwan issue to rally support for the CCP and his personal rule.”

A fast-growing China didn’t have to choose between guns and butter. It seemed able to deliver both. But with slower growth, Xi will have to make harder choices. News reports from Beijing this week suggested that the Chinese leadership doesn’t plan to follow the standard Western path of using economic stimulus to boost growth. The consumer economy will likely suffer. But will the military? I doubt it. The largest weapons buildup in history is likely to continue.

Much like Russia, a declining China might focus even more on Western threats and imagined plots. In his “Sinocism” blog this week, analyst Bill Bishop noted that China’s intelligence service, the Ministry of State Security (MSS), has created a new social media site on WeChat to animate the spy fever. The move “makes complete sense given how in the Xi Era everything is national security,” Bishop wrote.

The MSS blog warned ominously this week: “We have reached the most critical moment, defending national security, and we cannot yield an inch, not a single step can be conceded.”

Keith Richburg: Xi will face a crisis of legitimacy

There is now little doubt that China’s post-pandemic economy is in the doldrums. Most worrisome of all for the country’s Communist rulers is the youth unemployment rate, apparently so bad the government stopped publishing statistics. Officially, more than one-fifth of young people between 16 and 24 are out of work, although many experts suspect the number is higher. Officials have been telling young people to stay in school longer, take a less prestigious job or go to work in the countryside rather than enter such an inhospitable job market.

Unemployed and potentially restive youths must be particularly concerning to Xi, who is just completing the first problem-plagued year of his unprecedented third term in power.

China’s young people have historically been at the forefront of reformist movements and rebellions that have challenged the existing order. They include the student-led May Fourth Movement of 1919 and the June 4, 1989, Tiananmen Square uprising that was brutally crushed by the People’s Liberation Army.

After the Tiananmen massacre, China’s rulers adopted an unspoken social compact with the population: The Communist Party offers them boundless economic growth, the opportunity to get rich and some expanded personal freedoms in exchange for its continued right to rule.

For the first 30 years of the Communist regime, starting in 1949, the party claimed its legitimacy by virtue of having emerged victorious from the civil war. Since paramount leader Deng Xiaoping’s opening and reform program in 1979, the party has based its right to rule on having presided over China’s rapid economic growth and development — or what is called “performance legitimacy.”

A slowing economy and fears of a coming period of deflation pose a very real risk for the party and for Xi if they can no longer point to a booming economy to justify their authoritarian grip. High youth unemployment, plus a collapse of the property sector — where most Chinese invest their savings — is a potentially combustible combination.

Autocrats facing domestic troubles often look for an overseas crisis to deflect attention from problems. China has lately become more bellicose toward Taiwan and more assertive in the South China Sea. As the economic news worsens, the danger of a potential conflict will likely increase.