At the centre of the world’s emerging economies are the BRICS, but one of them shines brighter than the rest. In recent days, Jim O’Neill, who came up with the BRIC term in late 2001, told the BBC that the grouping has prospered far more than he envisioned 15 years ago. “And it’s primarily because of China,” the former Goldman Sachs banker noted.
China looms large in our imaginations. It has, we are told, powered global growth and will set the rules of our era. Many say this time in fact belongs to Beijing. Yet China’s century, if it ever existed, will be short. In fact, it appears already over.
Over already? For one thing, China’s economy, the motor of the country’s rise, looks like the engine of its fall. Wednesday, Beijing’s National Bureau of Statistics reported that the country’s gross domestic product grew 6.7% in the third calendar quarter, the same rate announced for both the first and second quarters of this year. The extraordinary consistency is remarkable and suggests Beijing is not accurately reporting the country’s economic performance. No economy, especially an emerging one, can grow without volatility.
Although Chinese leaders have been able to shape global perceptions with their announcements, scepticism exists. Citigroup chief economist Willem Buiter, who called China’s data“mendacious”, believes growth is about half what is routinely reported. Christopher Balding of Peking University’s HSBC Business School, examining bank payment data, thinks China’s economy is close to a zero rate.
Yet even if China were growing at the announced 6.7% rate—dubious, to say the least—the country is creating debt four times faster than incremental GDP. No one knows how much debt the country has incurred in its frantic growth push, but the accumulation of obligations is worrisome. China is heading to a debt crisis, as the Bank for International Settlements, the bank for central banks, warned last month.
And the Chinese people are evidently concerned. The country is bleeding money, a sign of their fundamental lack of confidence in their economy and society. Net capital outflow last year reached $1 trillion according to Bloomberg, the financial data provider. This year, outbound flows could, despite the imposition of extraordinary controls, match 2015’s total or even exceed it.
Some observers see China returning to a period of robust growth due to a consumption-powered rally, but there is a developing consensus that the country’s economy will, over a long period, stall. Washington, D.C.-based scholars Dan Blumenthal and Derek Scissors make this case in their recent essay, “China’s Great Stagnation”.
More likely in my view is a sharp crisis, largely the result of misguided policies applied over the course of the past decade. Chinese leaders will, I believe, continue to use every policy tool to keep the economy going until they can no longer do so. When they can no longer do so, the economy will go into free fall. For various reasons, including the failure to implement reforms, China has passed the point of no return. Chinese leaders, it appears to me, are merely delaying the inevitable.
Yet whether the economy fails in a crash or endures decades of recession and recession-like stagnation, the country’s leadership will have to make tough choices.
In fact, Beijing already has had to do so. The biggest surprise from this year’s National People’s Congress was the announcement that the budget for the People’s Liberation Army would increase only 7.6%, well below last year’s 10.1% rise and the first single-digit increase since 2010. Senior officers grumbled in public over the relatively paltry rise. Lt Gen Wang Hongguang, for instance, said the armed forces should have received a 20% increase.
And even in these relatively flush times, Beijing cannot meet basic obligations. Last Tuesday, more than a thousand demobilized soldiers, wearing green fatigues, staged a protest in Beijing across from the headquarters of the Ministry of National Defense.
The demonstrators demanded relief: promised jobs, pensions, and social security.
At a time of rising demand at home, Chinese leaders have great ambitions abroad. Among other plans, they want to orbit a space station; build a base on the moon; plant military depots across the globe; and build two great transportation links connecting their country to Africa, Central Asia, and Europe, the “21st Century Maritime Silk Road” and the “Silk Road Economic Belt”. They are financially supporting regimes from Pakistan to North Korea to Venezuela to Zimbabwe. They are building a capital for Egypt and a canal for Nicaragua. At home, they are constructing cities without people and high-speed rail lines for deserted locations. Beijing has contracted the world’s worst case of Paul Kennedy’s “imperial overstretch.”
And, at the same time, Chinese leaders seem determined to provoke disputes in an arc from India in the south to South Korea in the north. In its surrounding seas—the South China Sea, the East China Sea, and the Yellow Sea—Beijing is trying to seize islands and close off international water. As it tries to do so, it needles the United States, its allies, and friends. And apart from Russia, North Korea, and a few other needy states, China has no friends of its own.
The challenge of meeting growing expectations with declining resources will have internal repercussions. The political system is in turmoil as an ambitious leader, Xi Jinping, seeks to consolidate personal control. While doing so, he has taken much of the economics portfolio from others and, in the process, made himself the “Chairman of Everything.” As such, he is now responsible for economic problems he cannot solve and for trends he cannot control. His only way out is to raise the flag of nationalism, to force others to rally behind him.
The world, therefore, has a stake in this internal turmoil because it’s possible to draw a mostly straight line between the troubled leadership transition and the country’s more provocative external policies. And much of this has to do with China’s generals and admirals easing themselves into a power brokering role in the Communist Party. As a result, some senior military officers now wield great influence over Xi, who relies on them for their backing.
Chinese policy is losing coherence, and one reason may be that senior officers are now so strong that they can do what they want with minimal—and in some cases no—oversight. They are, unfortunately, making their “military diplomacy” the diplomacy of the country.
Chinese leaders, both military and civilian, must be starting to see a closing window of opportunity. Soon, if they have not done so already, they will understand that their crumbling economy, which is on the ev
e of a debt crisis, will not support their long-term ambitions. We have to be concerned, therefore, that Beijing will lash out.
So China is passing its highpoint, which means the danger for all of us is now.
Gordon G. Chang is the author of The Coming Collapse of China. Follow him on Twitter @GordonGChang