Let’s separate the facts from the fiction as to whether China’s economy is faltering.
China has risen to be the second-largest economy in the world. It has used its Belt and Road Initiative to extend its economic reach globally, while concurrently building up its military. China is a formidable foe, but is it faltering?
The Chinese economy is heavily debt-driven. It is experiencing overproduction, depressed consumer spending, and low domestic demand, which has led to price wars, excessive competition, deflation, and diminishing returns, known as “involution.”
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China’s economy is built on subsidized domestic industries and exports. Beijing focuses on certain critical industries, subsidizes such areas, and then lets many of the competitors fail, leaving the strongest to survive and dominate both domestically and hopefully, for China, internationally.
This is occurring in the electric vehicle industry in China, where over 100 brands exist. In China, approximately 30 electric vehicle manufacturers have gone bankrupt, and about 50 more are facing financial strains due to price battles, intense competition, rising debt, overcapacity, decreasing demand, and a reduction in government subsidies. With about three years of declining vehicle sales in China, you can expect the Chinese auto manufacturing sector to continue to hemorrhage. Similar scenarios are playing out in other industries in the country.
The real estate sector, which has historically accounted for roughly 25% of China’s annual gross domestic product, has been an albatross over the country’s economy during the past several years. China Evergrande, a Chinese real estate developer, went bankrupt, and many other property developers have defaulted on their financial obligations. In China, people invest much of their wealth in real estate, where they pay for apartments prior to the completion of construction. With numerous real estate developers running into financial difficulties, many buildings have been left partially built. This has led to a considerable number of people paying for apartments that have not been completed, leaving their funds tied up indefinitely. Both Beijing and local Chinese governments have shown little appetite for addressing this situation.
All of China’s economic problems are further damaged by large government debt obligations, its population shrinking for four consecutive years, its birthrate falling to a record low, a problem with youth unemployment, an aging citizenry, a minimal welfare system, excessive manufacturing capacity, foreign entities reducing their exposure to the country, as well as its insatiable appetite for energy requiring the importation of vast quantities of crude oil and liquefied natural gas.
China’s answer to these domestic problems has been to try to export its way out of the situation, while continuing to invest in infrastructure.
Faced with U.S. tariffs, much of China’s exports have gone to other parts of the world. While this strategy has been met with some success, many countries have determined that China is simply dumping goods around the globe and have erected barriers of their own to China’s exports to protect their domestic industries.
Infrastructure spending is difficult to sustain on an extended basis and has caused local governments in China, the parties largely behind such projects, to take on increased debt.
Chinese President Xi Jinping likes to portray the United States as a declining power while touting China as a rising force. Xi has invoked the geopolitical concept of the “Thucydides Trap,” based on the rise of Athens (which he equates to China) to the established power of Sparta (which he sees as the U.S.) that led to the Peloponnesian War in ancient Greece, which proposes that war may frequently be unavoidable when an emerging power threatens an established hegemon. This was the overlay of Xi’s discussions with President Donald Trump during their recent meeting in Beijing regarding China’s interest in taking over Taiwan. While China has built an impressive military, its armed forces are still not up to par with the United States. In addition, Xi recently purged the Chinese military leadership. Thoughts of China taking Taiwan by force by 2028, as some experts have predicted, may be premature, especially with Trump in office.
With a faltering Chinese economy, Xi’s hopes for expansion may have to wait. Xi will have to concentrate on fixing the Chinese economy, while retaining his power, before making a military move on Taiwan.
Further, Xi might want to heed the lessons of the Peloponnesian War, in which Sparta ultimately defeated Athens.
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In summation, we must consider the facts and not be fooled by the fiction.
And that’s my take.
Perry V. Kalajian is an attorney, consultant, analyst, and national television personality.