China’s current economic problems should worry its neighbors, trading partners, and its rival super power, the United States. China, as a wounded tiger, is very dangerous.
There is a social compact in China: the CPC guarantees a good economic life to the people in exchange for political freedom. But now that the Chinese economy seems to be going through rough times, that social compact may start to unravel.
Nobel Prize winning economist Paul Krugman wrote in the New York Times that China “is suffering from ‘economic long COVID,’ a decline in private-sector confidence brought on by arbitrary government intervention, which began before the pandemic but has intensified since.” The tough measures imposed on its population to control infection also had serious effects on the Chinese economy.
Even before the COVID lockdowns, China’s economy appeared to be losing steam. China’s property sector has faltered with falling prices, a huge inventory of unsold units, and its heavily indebted developers are defaulting. Some 30 percent of the country’s economic activities and more than two-thirds of household wealth is tied up in real estate.
Gone are the days when the Chinese government allowed Chinese entrepreneurs to grow their businesses in line with Deng Xiaoping’s view: to be rich is glorious. Xi Jinping has clamped down on the free-market capitalism that had brought about China’s miraculous growth. The ideological Mr. Xi doesn’t understand China’s economic miracle and how to sustain it.
Jack Ma, the founder of Alibaba and poster boy of Chinese capitalism, was told to shut up after he criticized regulators for holding up the financial technology sector with their “pawnshop mentality.” His $34 billion stock listing was suspended and Ma disappeared from public view, ending up in Tokyo before going back to Hangzhou where he started as a teacher.
With their low level of confidence in the economy, Chinese consumers have been defensively saving rather than spending.
According to Krugman, China previously grew “largely by catching up to Western technology,” but now it faces the problem of too much saving, too much investment, and too little consumption. It therefore needs “fundamental reforms” to “put more income in the hands of families, so that rising consumption can take the place of unsustainable investment.”
“Inevitably,” Krugman points out, “growth has slowed. The International Monetary Fund believes that over the medium term China can expect a growth rate of less than four percent. That’s not bad – it’s something like twice the growth most observers expect for the United States. But China is still trying to invest more than 40 percent of GDP, which just isn’t possible given falling growth.”
In her weekly letter to subscribers, The Economist EIC Zanny Minton Beddoes wrote about “a problem that will be front of mind for Xi Jinping and the Communist Party: disenchanted youth. When I was in China in March, I met a group of young students for dinner. The sense that they saw their futures as less bright than their parents’ was palpable. It was a sobering conversation. Since then, my colleagues have done a tremendous amount of reporting and number-crunching. Their analysis corroborates that impression. China’s young are disillusioned, anxious and depressed.”
There is a growing scarcity of the high-paying, high-skilled jobs that students and their parents have worked for and are expecting. Youth unemployment had been rising and Chinese authorities stopped publishing the current youth unemployment rate. Fortune estimates that China’s record high 21 percent youth unemployment could actually be as high as 46.5 percent. High youth unemployment can lead to social unrest and political instability.
China’s political leadership has shown no sympathy for youth unemployment. They even lectured new college grads to lower their expectations and “eat bitterness” (i.e., toughen up). Washington Post reports that “eventually the government discovered a simple way to solve the problem of high youth unemployment: Pretend it doesn’t exist.”
The other problems are related: China’s shrinking labor force and its aging population. The one child policy is haunting them with less working age people supporting the elderly. Over 38 percent of the population is expected to be aged over 60 by 2050, adding to concerns over the state pension fund, elderly care facilities and medical services.
What is really worrisome is that at 70 years old, Xi Jinping realizes he has limited time to deliver the China of his dreams. That’s the same insecurity of Putin in Russia, which led him to his military adventurism in Ukraine.
The ageing leadership can divert attention from internal problems by stoking nationalism and invading Taiwan. They now have patriotism classes in China and Hong Kong, probably where Sara Duterte got the idea for the Makabayan subject she added in our grade schools.
Krugman clearly states the dangers: “You don’t have to be a xenophobe to be worried about the possible future actions of a superpower whose leadership seems to be growing more autocratic and more erratic with each passing year…
“China’s rulers have long relied on economic achievement to give them legitimacy. Now they’re facing trouble on the homefront, most immediately in the form of rapidly rising youth unemployment. How will they respond?”
An article in Project Syndicate adds up the dangers to countries like ours.
“Today, China is building a naval base in Cambodia, which has leased to China one-fifth of its coastline and some islets… This would further strengthen China’s position in the South China Sea, where it has already built seven artificial islands as forward military bases, giving it effective control of this critical corridor between the Pacific and Indian Oceans.
“China’s willingness to violate international laws, rules, and norms compounds the opacity problem. The Chinese government has repeatedly reneged on its international commitments, including promises… not to militarize features in the South China Sea…
“Ominously, Xi’s appetite for risk appears to be growing. This partly reflects time pressure: Xi seems to believe that China has a narrow window of opportunity to achieve global preeminence before unfavorable demographic, economic, and geopolitical trends catch up with it.”
China, as its economy falters, is like a dangerous wounded tiger. And as Krugman puts it: “realistically, China’s domestic problems make it more, not less, of a danger to global security.”
Boo Chanco’s email address is bchanco@gmail.com. Follow him on X (Twitter) @boochanco