By Paolo von Schirach —
WASHINGTON — A few years ago, America’s China watchers decided that Beijing’s economic rise was truly broad-based and self-sustaining, therefore unstoppable. The Chinese economy was growing at 10 per cent a year, year after year. Fantastically large modern cities, like Shenzhen, in just a few years had emerged literally out of nothing from muddy fields. Armies of newly minted engineers diligently working for modern firms built skyscrapers, new factories, power plants, airports, container terminals, and thousand of miles of new railway tracks especially designed for made in China super fast trains. Indeed, today China is a manufacturing giant, and a major world player in multiple sectors. From electric vehicles to telecom equipment, from pharmaceuticals to industrial robots, Chinese companies are everywhere, and often in the lead. Not to mention China’s major advances in Artificial Intelligence and the cascading effects AI is having and will have in boosting Chinese productivity and innovation.
Global footprint
And this is not all. Beyond this spectacular domestic economic development that lifted hundreds of millions out of poverty and into a reasonably comfortable middle class standard of living, China progressively extended its influence abroad. This was done through a well-crafted web of new commercial agreements and direct Chinese investments in infrastructure, mining and more. From Asia, to Africa and Latin America China’s footprints are literally everywhere. The Belt and Road Initiative was conceived with the far reaching and ambitious goal of creating a modern, China-centric, silk road. It features new highways and railways, dry ports, trans shipment centers and more. This modern infrastructure web was designed to link Asia, Europe, and even Africa and Latin America, to China. Most of this shining new infrastructure was and is financed by Chinese banks and built by Chinese engineering firms. Given this momentum, it seemed inevitable that China would soon surpass the mature, lumbering U.S. economy. While still growing, America could simply not match, let alone exceed, China’s entrepreneurship, focused investments and rate of growth.
“We were mistaken”
But a few years later at least some western China watchers had an almost total change of mind. “We were all mistaken”, they proclaimed. China did not become nor is it likely to ever become a self-sustaining world class economy, outcompeting the United States and other developed market economies. While it had some remarkable achievements, Chinese ideology is the country’s worst enemy. It is ruled by the Chinese Communist Party, CCP, autocracy. The CCP is the only source of authority in China. No policy debates. No discussions. As a result, China was and will continue to be a top-down, command economy. In unchecked autocracies, there are no self-correcting mechanisms. Quite often, wrong policies are pursued. Large resources are wasted.
Deep down, the problem is that the CCP main objective is not to promote economic growth but to make sure that it remains solidly in power. In order to do this, it must retain, in fact strengthen and tighten control on every aspect of the Chinese society –the economy first and foremost. Which is to say that the CCP is not focusing today nor will it focus at any time in the future primarily on unleashing China’s entrepreneurial forces in order to foster additional economic growth. From the party’s perspective, a truly free economy, while probably much more dynamic, would escape political control. And this is unacceptable. For the Chinese Communist Party, political control on the economy and all its key actors is essential, even at the cost of dampening or even suffocating entrepreneurship and innovation.
The party must be in control
Especially since Xi Jinping took over as the unchallenged supreme leader in 2012, it became obvious to most observers that, far from liberalizing anything, the CCP leadership was and is bent on strengthening its firm political control and guidance on all companies, public and private. This means that through various instruments of control and supervision the party makes sure that all corporate plans, including investment strategies, launching new products, and more are and will always be following party priorities. Such intrusive micromanagement cuts into the private sector-led entrepreneurial drive that was at the foundation of much of China’s spectacular growth in the previous decades.
As a result, large corporations have started behaving like state-run bureaucracies. They follow orders. Furthermore, after the consolidation of Xi Jinping’s power position as the absolute leader of China, it became clear that, following his directives, the large State Owned Enterprises, SOEs, however inefficient, would continue to dominate China’s economy, fulfilling their political more than economic role of controlling strategic sectors like banking and energy.
What all of this means is that, in practice, rather than responding to market signals, Chinese corporations respond to CCP orders that come in the form of mandatory GDP growth rates assigned to all Provinces by the Communist Party leadership in Beijing and enforced by Provincial Party leaders.
Without getting into too many details, the CCP is mostly focused on GDP growth for its own sake, regardless as to how and at what cost production targets are achieved. This means that basic economic considerations like cost-effectiveness, profit margins, markets’ ability to absorb additional supply, and levels of corporate debt are irrelevant. The local Communist Party leadership will see to it that companies enlisted in the drive to meet production targets will get to their pre-assigned targets, so that pre-assigned GDP growth numbers will be achieved. The party will make sure that, profitable or not, the companies will always have the liquidity they need to stay afloat, even if they produce at a loss on an ongoing basis. State banks, responding to political orders issued by the CCP authorities, will always provide fresh credit as needed. By the same token, whenever necessary they will be instructed by CCP local leaders to roll over existing corporate debt.
Gigantic failures
That said, this system allowed fantastic failures like the gigantic real estate sector collapse. It so happens that for most Chinese savers real estate had become the preferred form of investment. Based on the fantasy that real estate prices can only go up, millions of Chinese savers put all their money in real estate, with the absolute confidence that this was and will always be a safe asset. Everybody seemed to gain from this delusion. Local governments kept selling land to developers, this way financing their expenditures. Developers presold apartments to eager investors, many of whom often collected several units as “safe investments”. With the cash collected from the presales, the developers went back to local governments in order to buy more land so that they could start new construction projects. This went on for many years, this way creating a huge bubble.
Well, when the market became ultra saturated, buyers dwindled, and prices went down. Given the monumental oversupply, with millions of empty units, it is impossible to rebalance demand and supply within a reasonable time frame. Hence colossal failures, such as the Evergrande Group real estate conglomerate. Across China, many developers went bankrupt, while millions of savers have been left with devalued properties on which they still owe mortgages, while many others lost the deposit money they had handed over to dishonest developers who did not build anything. The real estate “wealth effect” evaporated.
If we take into account that real estate, with all its related web of suppliers and vendors, including financial services, make up almost 30 per cent of China’s GDP, the collapse of this sector is indeed a very severe blow to the entire Chinese economy. To put this in perspective. there are now anywhere between 65 to 80 million empty housing units in China. They could comfortably house anywhere between 160 to 200 million people. This is more than the entire population of most countries.
Now, if we take into account that China is also facing a drastic population decline, with fewer and fewer people getting married and most women having one child or none, at best demand for new housing will stay soft for many years. How did the Communist Party allow this speculation driven catastrophe? Nobody really knows. But it happened. At the very least this gigantic failure is an indication that the all-seeing central planners in Beijing are not that good. They lost the plot.
It shines but it is not that good
Furthermore, think about Chinese high speed trains. In almost no time, China built an impressive network of railway tracks expressly designed for made-in-China high speed trains. To be precise, 48,00 km, or 29,200 miles. In contrast, how many high speed trains are in service in the U.S.? Zero. Yes, zero. America has no real high speed trains. (The Amtrak Eastern Corridor has higher speed trains. But it cannot deploy truly high speed trains because this would require a total reconfiguration of the railway tracks. An impossible task in densely built areas. California is trying to build tracks for high speed trains. But the goal to link San Francisco and Los Angels is very distant, while construction costs have exploded.)
Undoubtedly, China is way, way ahead in this sector. However, here is one detail: most of China’s rail lines lose money –consistently, year after year. Only two or three rail companies are profitable. In a market economy a perennially money losing business would go bankrupt. But not in China. The same applies to the biggest airlines. The three largest state-owned airlines in China — Air China, China Eastern Airlines, and China Southern Airlines — collectively reported their fifth straight year of losses in 2024. Yes, planes are full; but tickets sales do not cover costs. And the list goes on.
So, China’s economy is truly big and shiny; but it is also very inefficient. There is debt driven, excessive production in multiple sectors. Chinese consumers feel strapped because of a slowing economy. Consequently, they do not buy much. Looking into the future, there is an unhealthy high level of youth unemployment. University graduates work delivering food.
Demographic decline
At the same time, China is rapidly becoming a country of old people who are and will be in need of health care and social services that the government cannot provide on the needed scale. Therefore, today a young Chinese couple has to take into consideration that in later years the two of them will have to take care of two sets of aging parents. This is a heavy financial burden. And this explains the Chinese family propensity to save rather than consume.
Finally, we have ample evidence that the rich in China try their very best to smuggle their money abroad using any possible systems, often illegal ones, including suitcases stuffed with dollars. According to available data, “unexplained” capital outflows in the past decade amount to anywhere between U.S. $ 200 to 300 billion. Underground banking networks in China have been measured in trillions of yuan in cumulative flows over time. These numbers imply large covert financial flows. It is odd that the well to do in China want to take their money out. They have very little confidence in the future of the country that made them rich.
Not a disaster
And yet, and yet, China is hardly a total disaster. Yes, two contradictory realities seem to coexist in China. This baffling country has both: enormous inefficiencies and –yes– cutting edge technologies that are on par with, and sometimes ahead of the West, posing enormous competitiveness challenges for American, European, Japanese, Korean and other players.
If we think about it, this contradiction it is not so strange, after all. In China, the state has the power to direct enormous resources into R&D and investments in leading technologies. At times, this means waste, due to bad choices. However, very often it means success. Besides, at times, advance planning created strategic advantages. For instance, while no one was paying attention, China cornered the strategic minerals market, while creating an unrivaled capacity, (more than 80 per cent of the world total) in rare earths processing facilities and related technologies. The result is that the rest of the world now depends on China’s good will when it comes to acquiring indispensable refined earth earth minerals. Without them, there is no way of making the small but critical components that help run almost any technological item, from cell phones to cars, to fighter jets.
And China made immense advances in industrial robots, while it dominates the global solar panels market. Giants like the telecom firm Huawei now are almost unopposed in some markets. Last but not least, China’s defense industries have grown exponentially. The U.S. lost almost the entirety of its shipbuilding capacity, except for a few shipyards that build ships for the U.S. Navy. In contrast, just one shipyard in China outproduces the entire United States shipbuilding capacity. And the list goes on.
Pessimists and optimists are both right
As we can see, the divide in the West between China optimists and China pessimists is a false one. Both camps are right –to a degree. I would argue that, in the long term, the pessimists will be proven right. This systemically flawed Chinese system will fail. Too many inefficiencies. Too much waste.
However –and here is the real issue– even if this is true, when will China fail? Most likely, not any time soon. Indeed, according to realistic projections, in China’s case, the moment of truth will come maybe in twenty or twenty five years. In the meantime –inefficiencies and all– China will continue to be a very capable, determined and formidable adversary. An adversary whose leaders are totally devoted to the goal of replacing the United States as the leading world power in all spheres: economy, trade, technology, military, culture, and geopolitical status.
Even if inefficient, China is still a threat
If we just watch, doing nothing, the Chinese may have time to achieve this goal. Some may argue that a twenty or twenty five years waiting time does not seem that long, if we consider the arch of history. Therefore, we could just wait for China to fail. Like the Soviet Union in 1990, China will eventually implode. However, this “just wait, and watch them as they destroy their economy” approach would be most unwise. China is a determined opponent. Despite its significant shortcomings, it is still capable of directing massive resources to fulfil its hegemonic policy goals. It can advance quite a bit in twenty years. It took Third Reich Germany much less time to go from weak economy to world class defense manufacturing giant. Likewise, after WWII, in about twenty years, Japan transformed itself from utterly defeated and semi-destroyed country to leading global economy.
And let’s keep in mind that China –waste, massive debt and inefficiencies notwithstanding– is not starting from scratch. It is already the biggest industrial power on earth, and a recognized global leader in many leading technologies. We ignore or downplay its impressive achievements at our peril. Let’s get busy!
Paolo von Schirach is the President of the Global Policy Institute, a Washington DC think tank, and Professor of Political Science and International Relations at Bay Atlantic University, also in Washington, DC. He is also the Editor of the Schirach Report