China might survive
China might survive
Though slowing, the Chinese economy may yet prove to be dominant
One year ago, in August 2022, I wrote that “China might collapse”. While that is still possible, I don’t believe in predicting the future – it’s too complex. A better way is to envision different possible scenarios. The Chinese Communist Party (CCP) is acutely aware of its weaknesses and is working to fix them. In this post, I’m going to play devil’s advocate to the arguments I made about Chinese weakness in my previous post.
Rebutting Chinese collapse
Financial distress
China is extremely indebted, particularly in the overbuilt housing sector. However, most of these loans are in the local currency, yuan. In the event of a debt crisis, China could simply print more yuan. Printing more yuan might cause inflation but China is experiencing the opposite problem right now, deflation. If the debt was denominated in a foreign currency, like in most other developing countries, they could not do this.
Demographics
China is facing demographic headwinds and the population is expected to shrink to less than 1 billion by 2100 from 1.4 billion today. But 1 billion is still three times the US population of 330 million. There are two more problems.
First, urban factory workers are 3-4x more economically productive than rural farmers. The Chinese urbanization rate is still only 60-65% versus 80+% in Western industrialized countries. China still has a lot of untapped rural labor and as they urbanize the economy will get a boost.
Second, the iron grip the CCP has over the people of China means that any pro-natal family policies they enact are likely to be successfully adopted. There are 10 million abortions in China every year. If abortions were banned (except health-related abortions), it would lift the birth rate by almost 50% from 1.3 children per woman today to 1.9. Other policies, like a 3 Child Policy or increasing immigration would further offset the falling population.
Limited domestic oil
A historic weakness of China is that they import two-thirds of their oil, mainly through the vulnerable Strait of Malacca. Three factors have changed that may obviate this vulnerability.
First, the Ukraine War has pushed the Russians into China’s arms, marrying a commodity exporting powerhouse (Russia) with a voracious resource consumer (China). Russian oil exports can flow overland to the east or through the melting arctic by boat, both routes bypassing the Strait of Malacca chokepoint.
Second, China has secured oil supplies through overseas diplomacy, such as its Belt and Road Initiative, brokering Saudi-Iranian peace (both major oil producers), and leading the BRICS organization, which produces half the world’s oil.
Third, the Chinese are undertaking a number of initiatives to reduce oil demand, ending the need for its import entirely. They are deploying the worlds biggest fleet of nuclear reactors that are powerful enough for heavy industry. They are rapidly scaling domestic electric vehicle adoption, and local automaker BYD makes more cars than Tesla. Finally, the Chinese are quickly rolling out grid-scale renewables like wind and solar.
Governing system
The most difficult arguments to refute about Chinese weakness are the fragility of its autocratic government and history of political instability. Here though, technological advances my enable the CCP to repress its people for far longer than previously imagined.
The CCP is a techno-police state with social credits scores, ubiquitous facial recognition, and a Great Firewall over the free internet. Its 1.4 billion people are a resource to train AI models, enabling novel future repression. Total control over the media enables the CCP to radicalize the population with nationalist propaganda. And continuous leadership from Xi Jinping (read: lifetime dictator) will enable the CCP to plan long-term.
Implications for US policy
It’s difficult to convey the vast scale of China’s economy, but one fact helps the observer: between 2011 and 2013 China used more concrete than the US in the entire 20th century[i]. But regardless of future China’s collapse or survival, its highly likely that this growth will slow. This prediction is based on math, as the overall economy reaches a large size, it will be extremely hard to sustain high economic growth rates. Since peaking at 14.2% growth in 2007, the Chinese economy has slowed to 3% growth in 2022.
A recent article in MIT’s journal International Security studied every case that a rising great power’s growth slowed after rapid growth over the last 150 years. It found that such countries become more aggressive, especially if they have autocratic ruling regimes. We should expect, and have already seen, the same from China. The point of maximum danger is in the 2020s, while Xi Jinping is still in power and China still has momentum from its breathtaking rise.
The US must balance accommodating China’s rise without accepting new security risks.
[i] https://www.forbes.com/sites/niallmccarthy/2014/12/05/china-used-more-concrete-in-3-years-than-the-u-s-used-in-the-entire-20th-century-infographic/?sh=7ae4136b4131