President Joe Biden said in a May 28 interview with Time magazine that China's economy is “in crisis.”
He is right.
And we should care, because Xi Jinping may try to solve our economic problems by starting a new war.
At first glance, Biden's pessimistic assessment seems wrong: China's gross domestic product grew much better than expected, growing 5% year-on-year in the first quarter of this year, according to official figures from the National Bureau of Statistics, just slightly above the robust 5% increase for the whole of last year.
But neither report makes sense. As Ann Stevenson Yang of J Capital Research told me this week, “I don't think the numbers mean anything anymore.”
On December 17, 2019, President Xi Jinping inspected a salute aboard the aircraft carrier Shandong at the naval port of Sanya, Hainan Province. On April 24, Admiral John Aquilino, commander of the U.S. Indo-Pacific Command, warned that China intends to be capable of invading Taiwan by 2027. See Li Gang/Xinhua via Getty Images
There's currently a big gap between what's reported and what we can observe. The widely followed Rhodium Group believes the economy grew about 1.5% last year, roughly the same as what Biden reportedly told a group of Democratic donors in Park City, Utah, last August: “We're growing closer to 2% a year now.”
Growth has almost certainly slowed since then. “The Chinese economy is in a gradual downward trend,” Andrew Collier of Orient Capital Research in Hong Kong told me.
“Startups are closing, no one can find work, millions are paying mortgages on apartments that aren't even built, and urban services are shutting down. It's tough for Chinese people,” said Stevenson Yang, author of “Wild Ride: A Brief History of Opening Up and Closing Up China's Economy.” “The sad thing about China is that its economic model has reached the end of its useful life, and the only way out is to change it or suffer greatly.”
“It would be really scary if the economic model stopped working,” she added. “Our economic model had a heart-stopping moment in 2008, but we knew that once we got through that downturn, capitalism fundamentally worked.”
China is now facing a long-delayed 2008 crisis.
In 2008, Chinese leaders Hu Jintao and Wen Jiabao decided not to let the economy fall into recession and embarked on the largest debt-funded stimulus package in history. China went on a construction spree that led to double-digit growth. As a result, the country is now severely overbuilt. For example, according to a former deputy director of the statistics bureau, China has enough vacant apartments to house more than 1.4 billion people. Some believe there are more than 3 billion vacant apartments.
Infrastructure, particularly China's rail system, was also overbuilt. Burdened by roughly $900 billion in debt, China Railway Corporation has closed at least 26 high-speed rail stations and begun cutting service.
President Hu Jintao and his successors as Premier Wen Jiabao will have to figure out how to repay the railway and other debts, which they will have no way of paying off even if the Chinese economy grows as fast as is currently reported.
In reality, China's national debt-to-GDP ratio is probably around 350% or higher – no one knows because there is so much “hidden debt” and Beijing inflates its GDP statistics.
One thing we know: a debt crisis is on the way and it could be the biggest in history.
Nearly all observers have encouraged China to move to a consumption-based economy before it's too late, but Xi Jinping won't do that. Nobel laureate Paul Krugman recently told Bloomberg TV that China seems “unable to take even modest steps to refocus on domestic demand.”
Xi Jinping has no intention of stimulating domestic demand or encouraging consumption, which would ultimately empower ordinary Chinese people and weaken the Communist Party's control over the economy, weaken the power of state-owned enterprises, a key support base for the party, and undermine the financial stability of China's large but shaky state banks.
Xi Jinping has only one solution left: pump money into factories and export his way out of the hole. But that plan assumes other countries will continue to accept Chinese products. “Free trade theory aside, this is not going to happen,” Krugman said. “China can't absorb it. The world is not going to accept everything China wants to export.”
Countries have already begun to resist. On May 14, President Biden announced increased tariffs on Chinese steel and aluminum, semiconductors, electric vehicles, batteries and battery parts, critical minerals, solar cells, marine and land cranes, and medical products. According to the administration, the tariffs are intended to “protect American workers and businesses from China's unfair trade practices.”
Biden's tariffs will accelerate this trend. Last year, U.S. imports of goods from China fell by an astonishing 20%. China is no longer the U.S.'s largest source of imports. U.S. exports to China also fell 4%. Overall, U.S.-China two-way trade fell 16% last year. Two-way trade in the first four months of this year is down 3%.
The European Union could follow suit with higher tariffs, and even Beijing's friends in the Southern Hemisphere are reluctant to accept Chinese goods.
So far this year, China's exports have not shown any notable growth: in the first five months, they're up just 2% compared to the same period last year, meaning Xi Jinping's plan is not working. Collier doesn't think the Chinese economy will “collapse” because there are “too many moving parts.” But he says the “structural decline will continue for years.”
“Given the importance of trade and the US dollar to the economy, we hope this will lead to a de-escalation of China's 'wolf warrior' diplomacy and improved international relations,” Collier said.
There is still a chance that China policy will ease, but China's aggressive leader may decide to take a more belligerent approach. Last August, Biden called China a “time bomb.” The trigger for the explosion could be Xi Jinping realizing that he cannot salvage the Chinese economy, which would mean he realizes that the window to realize his expansionist ambitions is closing.
And Xi Jinping may perceive his window of power as a closing sign as a way to stay in power: If Xi faces economic decline, will he accept forced retirement and possible imprisonment, or will he invade a neighboring country?
There are already signs of discontent within China's leadership and military, and President Xi Jinping may have thought that war would stop his political opponents from removing him from power.
Gordon G. Chang is the author of The Collapse of China and China Goes to War. Follow him on Twitter. Gordon G Chang.
The views expressed in this article are the author's own.
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Newsweek is committed to challenging conventional wisdom, seeking common ground and finding connections.
