Many in the West, the US in particular, have been singing the “China collapse” song since Deng Xiaoping embarked on economic reforms in the late 1970s and early 1980s. Yet the Chinese economy has performed exceptionally well over the last 40 years, with gross domestic product increasing from around US$200 billion in 1980 to more than $16.5 trillion in 2021.
However, the “China collapse” crowd dismiss this economic success as dumb luck that will eventually run out. US news media, for example, lament that China’s growth was driven by debt. They reason that over-leveraging will increase payment defaults and financial-system risks, eventually leading to an economic collapse.
Gordon Chang’s 2001 book The Coming Collapse of China echoed that message. According to him, the Communist Party of China and the country would be kaput by 2011 largely because of inefficient state-owned enterprises, the government’s inability or unwillingness to establish a democratic society, and non-performing loans.
Chang’s latest rant on China’s “collapse” was a recent Fox News interview in which he opined that the Delta variant of Covid-19 will doom the CPC. Time will tell, but in light of the government’s successful efforts to contain the virus, Chang will be wrong again.
Locking down areas where the pandemic was surging, conducting massive testing and vaccinations, China could control the spread of the Delta variant without shutting down the country or economy. That posture seems to be working: The number of new infections is receding while industrial production and exports are increasing.
According to Chinese government statistics, the economy is buoyed by increases in consumer spending and international trade, estimated at over 7% and 24% respectively in the first seven months. Indeed, trade hit a 10-year high during this period.
The growth momentum will likely continue if not expand because the government has been able to suppress problems and introduce effective remedial policies. Case in point is the “dual circulation” strategy.
Designating domestic demand as the engine of growth makes economic sense because of China’s low consumption/GDP ratio (less than 40%), relatively small non-mortgage personal debt (around 15%) and huge savings (45% of GDP). In this sense, making private consumption the driver of growth is an effective and practical policy.
To increase the quality and size of growth, China is opening up more widely to the outside world, expanding trade relations with developing countries, particularly those participating in the Belt and Road Initiative.
Further integration into the world economy to augment growth is paying off. China’s Ministry of Commerce revealed that the country’s international trade hit a 10-year high in the first seven months of this year at 24.5% increase year on year.
China will likely continue to be the world’s major supplier of consumer and industrial goods for many years to come. This is because the other major economies are struggling to control the spread of the Delta variant. The US, for example, is registering more than 100,000 infections each day, prompting some states to reconsider economic reopening.
It is perhaps against this backdrop that the International Monetary Fund and other organizations have predicted that China’s economy will increase by more than 8% in 2021 and around 6% over the 14th Five Year Plan period of between 2021 and 2025.
Yet the “China doomsayers” are not giving up. Their latest reason is less-than-expected consumption growth due to Covid-19 resurgence that will cause economic hiccups. But they will be wrong again, because history has shown that the Chinese government managed to reverse woes, as the 2008 stimulus package to counter the financial crisis attested.
Everyone is entitled to an opinion, but whether it bears out depends on the assumptions and information from which it is derived. In the “China doomsayers” case, they resorted to wrong assumptions, misinformation and ideological biases, thus generating wrong assessments.
The doomsayers wrongly assumed that democracy or neoliberalism is the “last man standing” when it comes to economic development and growth. But democracy and all its glories proved to be a hindrance rather than a promoter of growth in the developing world that embraced democracy. On case in point is India.
According to World Bank figures, the Chinese and Indian economies were of similar size in 1980, estimated at roughly $200 billion. But by 2021, China’s economy was more than five times that of India.
As in other developing economies, India is burdened with multiple political parties and a diversified society with different interests, preventing successive governments from gaining a consensus on policies. The end result is the introduction and implementation of archaic laws. Highly protective domestic industry legislation, for example, discouraged foreign investment, undermining industrial efficiency and precluding large-scale employment growth.
Recent reforms did not improve India’s investment environment much because they retained most of the unfriendly investment policies of domestic industrial and employment protection. Indeed, that was a major reason Prime Minister Narendra Modi’s “Make in India” industrial policy did not take off.
One can even argue that democracy did not create the West’s wealth. Before colonization, the GDPs of China and India were much higher than those of European countries.
Conquering and plundering Africa, Asia and the Americas greatly enhanced Western wealth and power. The US, for example, gained free land and resources after killing a large number of the indigenous peoples. Slavery gave American plantation and other business owners free labor.
Predicting the Chinese economy will be buried under a pile of debt is based largely on misinformation. The doomsayers fail to acknowledge that the majority of corporate debts are owed by state-owned enterprises (SOEs) to state-owned banks. Since both the creditors and debtors are owned by the state, repayment is simply the “left hand paying the right hand.”
The result is that payment defaults and therefore financial-system risk are very unlikely. For example, the large Chinese state-owned banks encountered a huge rate of non-performing loans (NPLs), more than 25%, in the 1990s. But the government bailed them out with more than $400 billion.
Tighter regulatory control and the bailout play a big role in China’s banks being just as stable and profitable as their Western counterparts. The ratios of NPLs to total loans were similar to those of Western banks. It is also noteworthy that the four Chinese state-owned banks are among the 10 biggest banks in the world.
With regard to household debt totaling 62% of GDP, 75% of that is attributed to mortgages, according to the People’s Bank of China, the country’s central bank. The distinction is important in explaining why household debts will not cause financial-system risks.
To obtain a credit card, the applicant must show that he or she is gainfully employed and has enough savings in the bank to cover the amount of credit applied for. With regard to purchasing a home, first-time buyers must put down a minimum down payment of 30% of its value.
For those who buy two or more houses, they either pay cash or put up a considerably higher down payment. And if the borrower is in financial distress, family members often contribute to making payments. Thus growing consumer debt might reduce consumption, but would not create a system breakdown.
Blatant ideological biases
Ideological biases cloud the doomsayers’ rational or objective analysis, leading to faulty or wrong assessments. Case in point is labeling Chinese leaders as rigid communist ideologues who can’t think out of the box.
However, Chinese leaders, including Mao Zedong, were competent and resilient. Case in point is when China decided to adopt the Soviet Union industrialization Five Year Plan (FYP) model to develop the economy in the 1950s. When the model produced mixed results – increasing industrial but decreased agricultural production – the leaders quickly shifted gear.
They implemented the “walking on two legs” policy, focusing equally on agriculture reform and industrialization. It worked: Food and industrial production increased.
Too, China was not a one-person dictatorship as Western pundits portrayed, though it is true that Mao had more power than any of his successors. The country was governed by a collective leadership, in that members debated development proposals before they became policies.
Under Mao, transforming an agrarian economy into an industrial one through the formation of communes or collectives was debated within and considered a good idea by the leadership. Collective farming, for example, would increase production through mechanization. Production increases would be shared by all, bringing economies of scale and improve socio-economic equality.
However, Mao’s Great Leap Forward (1958-62) failed miserably because of a number of factors, including poor policies made worse by natural disasters. But the leadership quickly ended the disaster and sidelined Mao before it pushed China over the cliff, an example of collective leadership.
The disastrous Cultural Revolution (1966-76), too, showed the flexibility of the leadership to turn misfortunes around. Immediately after Mao’s death, the leaders arrested the Gang of Four, stopping continuous revolution and embracing economic reforms and opening up to the outside world. This demonstrated that the leadership was pragmatic and willing to experiment with capitalist ideas.
The collective leadership tradition is still intact today, as policy proposals are still debated within the leadership. In addition, policies are influenced by public opinion. The Chinese government regularly seeks public input for policy formulation and implementation. Climate change is one of the policies driven by public opinion polls.
The world should be happy that the the doomsayers are wrong about China’s economic prospects. A collapsed Chinese economy would likely wreak havoc on the US and world economies because of globalization.
Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China’s Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.