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The Chinese Economy Is in a Death Spiral

Chinese Economy
Chinese yuan banknotes are seen in this illustration picture taken April 25, 2022. REUTERS/Florence Lo/Illustration

The Chinese Economy is in Trouble: “What we are going to see with China, for the first time that anyone can remember who’s alive, is an economy that’s twice the size of the U.S., possibly three times the size of the U.S., and it’s going to be very weird living in that world,” said Elon Musk on the “All-In with Chamath, Jason, Sacks & Friedberg” podcast.

At first glance, Musk looks correct. China is catching up to America fast. Last year, the Chinese economy skyrocketed 8.1%, producing $17.46 trillion in gross domestic product. The American economy clocked in at $23.00 trillion, growing only 5.7%.

Yes, Musk is America’s leading visionary, but this particular vision is off-target. The Chinese economy will never overtake America’s, at least not this century.

Elon Musk is making predictions by extrapolating. Extrapolation works most of the time, but not now.

Why not?

The Chinese economy – and the nation overall –  is passing a series of inflection points. The most fundamental one is demographic: The Chinese population is on track for a steep decline. The most immediate inflection point is economic: China is now contracting. The country needs growth to retire monumental debt, however.

We start with the “relentless maker and breaker of civilizations,” demography. Demography will break China, which according to demographers from Xian Jiaotong University is slated to lose half its population in 45 years. At the end of this century, China could be about one-third as populous as it is now.

The country, therefore, faces the sharpest demographic decline in history in the absence of war or disease. Panicked efforts to avoid the decline—moving from a one-child policy in 2015 to a three-child policy in 2021, for instance—have proven unsuccessful in increasing birth rates

Such a precipitous fall means that, if China is going to pass America to reach the top spot, it will have to do so within, say, a decade before a falling population begins to undermine economic performance. In the next ten years, however, China’s economy is more likely to come apart.

It is already in distress. In April, the economy clearly contracted. Industrial output was down 2.9% from the same month last year. Retail sales were off 11.1%. New car sales plunged 47.6%.

Draconian lockdowns, the result of Beijing’s “dynamic zero-COVID” policy, have essentially brought much of the eastern portion of the country, the heart of the national economy, to a halt. China’s ports and airports are operating at far below capacity, and river and truck traffic is way down, about 40% off.

China cannot ship what it does not produce. Factories are either closed or struggling. Even politically favored companies have been hit hard. Tesla’s Gigafactory 3, in Shanghai, was closed for three weeks due to the COVID lockdown. Now, because of a lack of parts, it is running at only 45% capacity.

Beijing, by ditching misguided disease-control policies, can eventually reverse the economic damage. What it cannot do is escape the consequences of its unprecedented buildup of indebtedness. Nobody knows how much debt China has accumulated, but an estimate of 350% of annual gross domestic product sounds about right. Because of the infamous “hidden debt,” the number could even be higher.

However much debt there is, China is now facing a reckoning. Beijing avoided a downturn in 2008 by overstimulating the economy, primarily with debt-financed infrastructure. Now, the country has to either pay back the debt or resolve the situation by other means.

Many believe that because there are not many external obligations the crisis will be easy to resolve. Yes, the Chinese people owe the money to themselves, but these types of crises, history shows, are the most difficult ones to fix because every fix requires that domestic parties—not foreign bankers—suffer. Beijing is trying to further delay a reckoning because it is concerned about social stability, which means the resolution of the matter will take far longer than anyone now thinks.

In the meantime, the debt-ridden property sector is beyond repair. Property developers, especially starting last September, have been missing payments and defaulting on obligations. Evergrande Group, once China’s largest property developer, accumulated a staggering $305 billion in obligations and is struggling, even with full government backing. It has been effectively rescued for the moment, but smaller developers are falling. Sunac China, now the fourth-largest developer, just missed a bond payment and announced it does not expect to make other bond payments.

On the surface, the situation looks manageable. New home prices in 70 major cities in April fell only 0.2% from the previous month. The market, however, was “frozen,” in other words, buyers and sellers were too far apart on price for transactions to occur.

“We’re not seeing the price collapse yet,” said Anne Stevenson-Yang of J Capital Research, to John Batchelor of “CBS Eye on the World” on Wednesday. “The Chinese government has stealthily put a whole lot of money into the developers so that they can hold their inventory off the market and keep from discounting by 30, 40, 50%.”

Government intervention can maintain prices, but it cannot force sales. Property sales by value fell 46.6% year-to-year last month, the biggest drop since August 2006.

Developers are adjusting. New construction starts as measured by floor area in April were down 44.2% from the same month last year. As a result, the demand for construction materials is tumbling.

Chinese Economy

A resident and a child look out through gaps in the barriers at a closed residential area during the lockdown, amid the coronavirus disease (COVID-19) pandemic, in Shanghai, China, May 10, 2022. REUTERS/Aly Song TPX IMAGES OF THE DAY

Indications for the future of the property market and, therefore, the economy do not look good. Property accounts for somewhere between 25% to 30% of total GDP. Around 70% of the household wealth of the Chinese people is tied up in property. Apartments have become more than assets in China. In China, they have become a store of wealth, the equivalent of money.

This type of Chinese “money” looks like it will lose value as confidence disappears. Investors pulled a record $17.5 billion of portfolio assets—stocks and bonds—from China in March. The U.S.-based Institute of International Finance notes that the outflow was confined to China and not part of a broader flight from emerging markets. The pullback continued a trend evident in February. The flight of capital is, from all appearances, continuing.

This trend will continue especially because the U.S. Federal Reserve continues to increase U.S. interest rates while the People’s Bank of China, China’s central bank, cannot match the rate hikes. Chinese monetary authorities are now caught in a bind. They need to force rates down to stimulate the economy, but such moves would aggravate capital flight.

The renminbi, one of the world’s strongest currencies last year, is now weak, down about 7% in the last three months. Last month was the worst ever for the Chinese currency.

The Communist Party, unwilling to implement structural reforms, is adopting last-resort measures. “The lockdowns have something to do with keeping people from knowing about this and keeping people from complaining about it,” said Stevenson-Yang, also author of China Alone: The Emergence from and Potential Return to Isolation. “This is what China typically does, is keep information from flowing around rather than actually address the problem. And they will be doing more of this as time goes on.”

Beijing is great on censoring, but the reckoning in the Chinese economy is coming nonetheless. China is fast approaching its death spiral, the point of no-return, where fear grips markets in a final crisis.

Gordon G. Chang is the author of The Coming Collapse of China and The Great U.S.-China Tech War. Follow him on Twitter @GordonGChang. Chang is also a Senior Editor for 1945. 

Written By

Gordon G. Chang is the author of The Great U.S.-China Tech War and Losing South Korea, booklets released by Encounter Books. His previous books are Nuclear Showdown: North Korea Takes On the World and The Coming Collapse of China, both from Random House. Chang lived and worked in China and Hong Kong for almost two decades, most recently in Shanghai, as Counsel to the American law firm Paul Weiss and earlier in Hong Kong as Partner in the international law firm Baker & McKenzie.

45 Comments

45 Comments

  1. Jacksonian Libertarian

    May 21, 2022 at 8:07 pm

    Authoritarian Cultures can’t compete with American/1st World Cultures. If they could, they would be the 1st World.

    China’s only advantage over the last few centuries has been Population, but Authoritarian Cultures can’t use Real Intelligences efficiently (command economies suck).

    The 1st world investment could only bootstrap China so far, eventually the growth was always going to end, and now it has.

    It remains to be seen if the Chinese people can get the corrupt Communist Party’s boot off their neck, and produce a Democracy that will efficiently grow. On the plus side, doing this will be easier with the stick of approaching poverty, motivating the elimination of the Communists. (The Authoritarian’s nightmare)

    • Eric Bishop

      May 23, 2022 at 3:11 pm

      I’m not a big fan of Musk, and I don’t entirely agree 100 percent with him. However, I do believe that with the rate of inflation being what it is in the U.S., it may well indeed end up being neck and neck with China’s economy. No, China will not surpass the United States’ current economic status. Rather, the U.S. economy will decline to the point to allow China to catch up. Elon Musk is a weird f%*-, (Lord bless him, I’m jk. He’s ok…). Smart but eccentric, and it’s that very eccentricity that can be off putting. It sometimes makes us dismissive when one such as Musk formulates a prediction, particularly, a prediction that nobody wants to hear. I’m sure Rome never had imagined that her walls would lay bare. Castles made of sand my friends. As is time in the hourglass. Even down to the carbon matter in our biological makeup. From dust ye come. To dust ye shall return…

      • Marty Kay Zee

        May 25, 2022 at 3:03 pm

        Musk is right about one thing: It takes 2.1 babies per woman to keep the U.S. or any population stable. American women are producing 1.6 today. We are in the process of “replacing” our old selves with not enough new selves to keep the lights on. Demographics is destiny.

    • Leon B

      May 23, 2022 at 5:40 pm

      If economy is that bad it may help to discourage them from attacking Taiwan at least!

      • paul holterhaus

        May 25, 2022 at 8:47 am

        Or ENcourage it..More likely……….Paul

  2. Daniel Davis

    May 21, 2022 at 9:52 pm

    I take everything Gordon Chang says with a massive grain of salt. It’s 2022 and the dude wrote a book nearly 2 decades ago saying how China was going to collapse by now, but here we are on the precipice of China dominating the World.

    At some point, if you’re gonna be a “geopolitical expert” that requires you to actually be right once in awhile. Gordon Chang has yet to get to that memo

    • Bo knows

      May 22, 2022 at 8:48 pm

      he is never correct and still pretends to be a China Expect,no sure how he did it.

    • sterling

      May 25, 2022 at 9:02 am

      and yet fox still trots out newt Gingrich and firends

    • Jameson Franklin

      May 26, 2022 at 4:33 am

      Other posters have pointed out that Gordon Chang has North, South, East and West utterly confused. Gordon ONLY points us in the wrong direction. Gordon’s heart holds a deep seated hatred for Mainland China and he troupes out biases that make his articles sound and feel good. Make no mistake Gordon Chang is always wrong about China. If anyone needs cancellation, it’s Gordon Chang. He’s a highly articulate faux prophet.

  3. Stefan Stackhouse

    May 21, 2022 at 10:23 pm

    As the late economist Herb Stein was fond of saying, “If something can’t go on forever, then it won’t”.

  4. Libertysdefender

    May 22, 2022 at 8:06 am

    Mark Steyn has been saying for over a decade that China will grow old before it grows rich. Most of the nations of the world seem to have entered dangerous demographic territory with the exception of the Latin and Muslim nations. The next 50 years are going to be interesting for those who will see it develop.

    • Don M

      May 23, 2022 at 6:01 pm

      More like he is an communist party’s spy agent who did a great job to fool the western elites and politicians about China’s development!

  5. Doro

    May 22, 2022 at 8:22 am

    All of this conjecture coming from a reeling US’s perspective sure seems a lot like the pot calling the kettle black.

    It seems hypocritical at best to pontificate about the failings of state capitalism when corporate oligarchy is such an abysmal failure in itself, perpetually on the precipe of collapse for all but the disproportionately insulated upper echelon.

    • Zane

      May 22, 2022 at 12:25 pm

      How is western democracy fueled capitalism “perpetually on the precip[ic]e of collapse?” You’re gonna have to provide examples.

      The reality is that western ideals of capitalism, best currently represented by the US, will endure because at their foundation are based on the recognition of the sovereignty of the individual and individual liberty.

      All China has to offer is suffering and oppression.

  6. alex cokonis

    May 22, 2022 at 8:32 am

    China depends heavily on the economy of the rest of the world. One big problem the Ukrainian war destabilised the whole world economy by the imposed sanctions and the Covid greatly diminished the transport supply line. If they want to get back to normal they should pressure Putin to stop the war and even better see if they can get rid of Putin. The present Covid problem they can slowly control it.

  7. Dian jen

    May 22, 2022 at 9:30 am

    Gordon Chang has so much hatred for China and its people he has been long wishful thinking that China would fall back into the dark age somehow, someway, sometime….
    What a traitor to the Chinese people, born a Chinese? When has he ever said a good word about China? He needs to look deep down into his twisted and tormented soul.

    • Happy

      May 22, 2022 at 11:16 am

      Imagine if China had developed along the path of S. Korea & Taiwan….gradually becoming vibrant democracies. Today, there would be no question that China would be No. 1 in everything. Take Taiwan’s GDP and multiply by 50! The really patriotic/nationalist Chinese would dump the CCP and give its 1.4 billion the freedom to compete and actually take over the world.

      • Alex Logan

        May 23, 2022 at 10:24 am

        Taiwan and South Korea both did most of their growth under pretty brutal, totalitarian regimes before transitioning to the two-party governments of today. The question is how coupled economic vs social freedoms really are.

      • Menotu

        May 23, 2022 at 7:51 pm

        Take over the world?

        The Chinese can’t live with the rest of us as partners? Together raising humanity to higher levels of prosperity and peace?

    • sterling

      May 25, 2022 at 9:07 am

      all that sounds like great reasons not to think being “Chinese” or any other “nationism” nonsense could ever be enough for anyone alive on this planet
      you need to gain a soul because thinking someone belongs to a nation is very empty rhetoric.

  8. Dian jen

    May 22, 2022 at 9:47 am

    Gorden Chang is a China hater, not a China “expert”. He has never been right about China, not even close.
    China will do fine as long as they have a good and strong leader, which they have in Xi. Ask the same question; “is your life better off than 10 or 20 years ago?’ to a middle class American, and a middle class Chinese, you would get the answer that would indicate where our respective future will look like.
    Gordon Chang has no credibility!

    • Steven T Rogers

      May 22, 2022 at 11:53 am

      “Xi is a good and strong leader”. Uighers love him.

    • Viper72924

      May 23, 2022 at 1:57 pm

      You are definitely biased on this subject.

  9. Frank

    May 22, 2022 at 12:06 pm

    If China is so mired in debt, how come they hold trillions of our bonds?

    • Mick Dudeman

      May 23, 2022 at 3:57 pm

      Because their treasury holds gigantic debt with mostly garbage on their balance sheet. To gain some balance they buy US treasuries,which have stable value. World’s biggest bank, ABC is holding more debt than the value of all banks in theoretical deposits.

  10. Bard

    May 22, 2022 at 1:16 pm

    My concern is not so much the economic collapse of China, but rather how they will respond to the writing on the wall. As we know in the US, war is the great economic stabilizer.

  11. LTC Ted

    May 22, 2022 at 1:18 pm

    The modern times resort for economic depression has always been: Get involved in a war.

    I look for an invasion of the Republic of China on the island of Taiwan. Pretext: A false flag operation on the Red China coast. Shrieks about the operation being the first salvo from the U.S. and Japan. Rallying the Red China population for “sacrifices”. Long-term “anti-guerilla” action, and occupation of all the uninhabited or sparsely inhabited islands, especially the newly-militarized Spratleys. No overt action against the U.S. or Japan will keep the costs down.

    This will keep the proles at fever-pitch for many months, if not a couple of years.

  12. Dave

    May 22, 2022 at 1:25 pm

    China’s GDP may be large in terms of $$$, but it ranks #67 in terms of GDP per capita at $10,100 (2019 data). Russia is #63 at $11,460. The US is ranked #7 at $65,060. The #1 spot is little Luxembourg at $115,200. Ireland, surprise surprise, is ranked #5 at $77,160. No one really knows the size of the real market in China. Yes they have 1.3 Billion people, but how many are really adding value to the Chinese economy?

  13. Mynamehear

    May 22, 2022 at 4:45 pm

    “Yes, Musk is America’s leading visionary”

    Thanks for the great chuckle.

  14. Francis Maikisch

    May 22, 2022 at 6:40 pm

    Chang hasn’t been right about Communist China once. 20 years he wrote about the coming collapse of China & we’re still waiting.

  15. Marcus Bowen

    May 22, 2022 at 11:29 pm

    Today I got off a subway in NYC where I learned that at the very next stop, on that very train, someone shot a man to death. You can google Daniel Enriquez, it’s in the NYPost, and I remember seeing the unhinged looking guy who probably did it and intentionally got on to another train car instead of the one he was in.

    Reason i say this is because this is like the 150th or whatever murder this year in NYC, not to mention all the other major cities where crime is outta control, and gov’t is completely unable or unwilling to do anything about it. Meanwhile our kids aren’t learning math or reading, but they sure are learning about gender identities and gay sex, as per my 1st and 3rd grade kids telling me about this. And no, this isn’t just an NYC thing. All over the country it feels like this country is coming apart.

    Gordon, stop being the Jim Cramer of China studies, you’re a goddam clown not to mention some sort of weird self hating race traitor like that Samuel L Jackson character from Django. Either that or you’re a CCP operative deliberately planted here to stupefy dumb American policymakers with your retarded analysis.

    The best way America has competed is by giving great opportunities to those willing to earn it, not handing out recognition and benefits to those most willing to identify as victims and divide themselves endlessly against both America and each other. Time we go back to this rather than broadcasting that America is now a disgusting hellhole that still thinks its a five star resort.

  16. Wayne Howell

    May 23, 2022 at 3:28 am

    China will come back once the Covid hype is over. The Chinese people are very ambitious and not lazy like Americans.

  17. jiangqiushi

    May 23, 2022 at 6:36 am

    Come on Gordon, where is The Coming Collapse of China? We have been waiting so long.

  18. Max

    May 23, 2022 at 9:39 am

    Reading the comments on here proves one scary thing. Everyone is a loud mouthed, know it all, smart ass which will most definitely lead us ALL into the death spiral known as WWIII. Prepare Wisely.

  19. Jw

    May 23, 2022 at 12:43 pm

    I find reading Gordon’s post about China very entertaining every time. Even though he’s been wrong about the collapse of China theory for more than 20 years, but this guy never give up, got to give him some credit for that. I just don’t know how he’s confident about his opinion after all these years when China’s GDP go from $1.2 Trillion in 2000 to $17.7 Trillion in 2021. Do I have to wait another 20 years for his prediction? 😂

  20. Keith S Thomas

    May 23, 2022 at 5:16 pm

    While I agree that Elon Musk is using simplistic extrapolation I’ll ask if the author is doing the same with China’s declining population? I’m just asking for a friend.

  21. Someone

    May 23, 2022 at 5:57 pm

    I think we’re forgetting that Russia and North Korea will continue to be China’s #1 Allies, numerous African countries are in debt with china and will be forced to give up real estate and resources, and the west late response to the crisis in Ukraine will give China the confidence to conquer Taiwan unimpeded which will in the long run add to gdp when they figure out how they will squeeze resources and finances out of the country.

  22. Howdy

    May 25, 2022 at 6:43 am

    If China needs people to have children, it will simply force people to have them. Many prognoses based on Chinese not having children now fail to take this into account. But perhaps Westerners should look at themselves and their own decadence that caused them to stop having children!

    • sterling

      May 25, 2022 at 9:12 am

      what decadence? we have more money not having 5-10 children it isn’t Chinese arithmetic seeing that and then putting rubber on.

  23. greg

    May 25, 2022 at 10:57 am

    you seem to discount the transition of moving from a production economy to one of consumerism. that simply transition will allow china’s economy to grow. even with a 10 or 20% reduction in population.. there will still be 1 billion consumers.

  24. Jeff

    May 25, 2022 at 1:32 pm

    Musk has a truly awful track record when it comes to predictions. And not just on big picture issues. Even his projections for his own company are horrribly misleading. Give the guy credit for being a good engineer (I assume), but definitely tune him out any time he makes a prediction. Just because people are really good at one skill, doesns’t mean they should be listened to on topics where they clearly have no interest in being accurate or reliable.

  25. John Fro

    May 25, 2022 at 2:04 pm

    China will lose half of its population? Even the Black Death only took 25-33% of Europe-admittedly within a year or so, but still these things just don’t happen. The main issue is the amount of Chinese investment in valueless goods like ghost cities that no-one lives in and are crumbling. That was a huge waste of money with no ROI, eliminating a lot of the enormous wealth generated over the past generation. Any forecast of future wealth will be determined by the extent of this failure. They could have used their positive cash flow to buy foreign assets with good track records, but didn’t.

  26. Michael A Hill

    May 26, 2022 at 8:37 am

    Wow, you are the most uneducated Chinese man regarding your own culture.

  27. Jason Mundstuk

    June 12, 2022 at 11:42 pm

    As the author of The Coming Collapse of China,[5] Chang has made numerous predictions of the imminent collapse of the Chinese government and fall of the Communist Party since 2001.[10][11][12] Initially predicting a collapse in 2011, Chang revised his prediction on 29 December 2011 in the Foreign Policy magazine, writing that “Instead of 2011, the mighty Communist Party of China will fall in 2012. Bet on it.”

  28. GhostTomahawk

    June 19, 2022 at 6:17 pm

    Good riddance.

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