How fragile is China?

One of most questions I have been asked most persistently over the past 15 years is whether China’s economy is on the edge of crisis or collapse. This may seem a strange question to ask about an economy that grew at an average rate of 10% for more than three decades, and in 2015 posted GDP growth of 6.9% — one of the fastest rates in the world, and about three times the US economy’s average rate of growth since the 2008 financial crisis.

It seems strange because it is strange. No economy with anything close to China’s success record has attracted anything close to the amount of doomsaying that China does. Japan in the 1980s, for instance, was growing at about 5% a year and attracted varying degrees of admiration and fear. But almost no one seriously suggested that it would crumble. Gloomy views of Japan only began to gain traction after its epic stock-market collapse of 1990, and well into its “lost decade” during which growth stagnated at barely above zero. By contrast, speculation about impending financial, economic and/or political crisis has long been a staple of Western conversations about China, even as its economy barreled ahead. Why?

There are plenty of good reasons to worry about the Chinese economy’s future: debt is rising fast, the efficiency of the financial system is doubtful, too much of the economy is in the hands of lumbering state-owned firms that earn a low return on investment, etc. These concerns make it reasonable to project that China’s growth rate in future will be quite a bit slower than in the past. More debatable is the conclusion that these problems pose an existential threat to the Chinese system as a whole. A system, after all, can suffer a severe growth slowdown and still survive: again, look at Japan.

The underlying reason why people are so prone to jump from “China’s economy has serious problems” to “China’s system is at risk of collapse” lies in a political judgment, not an economic one. The simple form of this judgment is that China’s Communist Party-run state is illegitimate. If you think a system is illegitimate, you will naturally tend to look for reasons why it might fall apart.

The more nuanced version, avoiding the philosophical quagmire of how exactly you define “legitimacy,” is that China’s one-party authoritarian political system lives in contradiction to its dynamic quasi-capitalist economy. Rich countries are in general democratic. China therefore ultimately faces the choice of getting rich, or keeping its present political system: in the long run, it cannot do both. Economic weakness therefore might not simply be economic weakness. It might be a sign that this conflict between incompatible systems is becoming more acute, in which case one or the other (or both) will likely break down.

This view can claim empirical support. As I note in Chapter 12 of my book:

of the 56 countries whose per-capita GDP exceeded the global average in 2013, all but four were at least nominally democracies….The exceptions — Qatar, Equatorial Guinea, Saudi Arabia, and Kazakhstan — are all countries with small populations whose economies depend mainly on exports of oil and gas, a natural formula for authoritarian oligarchy. Among major economies, the only one other than China that is not really democratic in any meaningful sense is Russia. It seems likely that the Communist Party’s twin desires to turn China into a great economic power and to retain its own political monopoly are incompatible, and sooner or later one of those goals must give way.

The problem arises with that weasel phrase, “sooner or later,” or its ferretty cousin “in the long run,” which I used in the previous paragraph. How soon is soon? How much later is later? How many of us will be dead in that long run when China’s present arrangement breaks down?

The honest answer is that we just can’t know.  The latest World Bank estimates of per-capita national income put China at $7,400, still well below the world average of $10,800. This suggests that China could have quite a few more years yet before the clash between rising wealth and ossified politics becomes really critical. We also can’t know whether this clash will be resolved by a crisis or by a peaceful transition. Neighboring South Korea and Taiwan both managed to move from authoritarian to democratic rule without much economic disruption. I wouldn’t bet on this outcome for China, since it’s a far larger and more fractious society, but we can’t rule it out either. Finally, history is not physics: there are no immutable universal laws. China might just wind up being an exception to the general pattern, for any number of reasons.

One thing we do know for sure is that people have been predicting the imminent demise of China’s hybrid system since the 1980s, and so far these predictions have been wrong (though 1989 was indeed a very close call). So the next time someone suggests to you that China’s system is near collapse, ask them a) why all such predictions for the past 35 years have failed to pan out, and b) why their prediction is more credible than the previous false alarms. Only those that can give cogent responses to those two questions have arguments worth listening to.

 

 

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