When will China's economy collapse?

Working papers

For years, the rapid economic growth dominated the public perception of China. In addition to admiration for the effectiveness of a “Chinese model”, the rise of China and its consequences for world politics and international competition were also perceived as threatening. Meanwhile, the debate about the further economic and political development of China revolves around concepts such as crisis, turbulence, stagnation, crash or collapse. And again, China is interpreted as a threat, this time as a “stuttering engine” that is endangering the global economy. China’s further development is undoubtedly of great international importance and the country faces numerous challenges as a result of the continued economic dynamism. Instead of shrill horror scenarios, however, a differentiating view should guide the discussion about China's further development.

Is it about to collapse?

Year after year, predictions of the impending collapse of China attract public attention. Already on the occasion of the student protest movement on Tiananmen Square in 1989, it was discussed how long the Communist Party would be able to hold on to power. Considerations for a breakup of China into several states date from the early 1990s. This collapse was justified either in analogy to the collapse of the Soviet Union, with growing internal Chinese tensions or the expected death of the influential leader Deng Xiaoping. The economist He Qinglian then described the country in her 1998 Chinese book “China in the Trap” as almost “failed”. Growing income differences, the decline of central government authority, weak economic structures and the moral decline that accompanies the opening policy are endangering the system.

Against the background of China's accession to the WTO, Gordon Chang predicted the decline within a decade in his 2001 bestseller “The Coming Collapse of China” and justified this with the inefficiency of state banks and the high level of debt of state-owned companies. In connection with the revolution in Tunisia in 2011 and the “jasmine rallies” that followed in China, observers said that China would not be able to withstand “democratic pressure” in the long term.

In 2015, David Shambaugh, a professor at George Washington University and recognized China observer, diagnosed the "final phase of communist rule" in the Wall Street Journal. Flight of capital, a wealthy elite who are leaving the country in droves, growing political repression, widespread corruption and draconian attempts to combat it, the cynicism of state cadres and a cooling economy are characteristics of a "broken system" which is at the beginning of stagnation in the economy and politically on the brink of decline. A complete collapse that would take place in a violent and chaotic manner cannot be ruled out. In his book entitled "China’s Future", published in March 2016, he underlines this position again. The country was at a critical point, because without political reforms no further prosperity could be guaranteed.

Forecasting China's Future

China scientists have been discussing conceivable future scenarios for many years. The hope for a democratization initiated from above and taking place in a regulated manner is discussed as well as a “Singaporeanization”, a repressive neo-totalitarianism or a political dodging course initiated by socio-economic crises with an open outcome. Over time, it can be established that assessments of China's future oscillate between optimistic forecasts and apocalyptic prophecies. However, many observers consider an even longer continuity of the current political status quo to be likely. From a theoretical perspective, however, authoritarian systems are unstable due to their weak legitimacy, over-centralization of decision-making structures and the use of coercive measures, which makes the previous continuity of the Chinese system in need of explanation. In China studies, the transformation paradigm has given way to the resilience thesis. Resilience, i.e. the resilience of a political system, can be understood as the capacity to manage acute problems and to be able to "endure crises".

Features of the debate

There are three noteworthy aspects to the debate about China's future:

  1. It is characterized by economic explanations for political changes. As a result, economic development in authoritarian systems with regulated markets can initially be positive. As the level of prosperity increases, however, political change is inevitable. In order to guarantee a positive investment climate and based on demands from society, the state must guarantee property rights and legal security. Only through liberalization measures, so the argument goes, can scope for innovation and entrepreneurial creativity be created in order to prevent the economy from remaining at a medium level of prosperity. With regard to China, according to the findings, catching-up growth on the basis of low wages and the acquisition of foreign know-how is no longer possible. Political reforms are required in order to develop independent innovation achievements and the ability to increase productivity as well as to survive in competition with the highly industrialized countries, otherwise China will remain the workbench of the world. But this argument is based on an overly simple connection between economic development and political liberalization. Another problem with the analyzes is not to measure the Chinese system in terms of itself, but rather to judge it according to how it should develop according to Western ideas. This favors fragility assumptions that turn individual systemic malfunctions into existential crises. No Chinese “exceptionalism” per se - that is, a fundamental “Chinese peculiarity” or “otherness” - can be countered with these approaches, but China's dimensions, its heterogeneity and historical experience must be included in an assessment.

  2. In academic debates, scientists seem to want to avoid the mistakes that led to political events such as the collapse of the Soviet Union or the Arab Spring not being foreseen. Playing through different China scenarios is to be understood as an intellectual finger exercise, which, from a theoretical perspective, suffers from the fact that relevant influencing factors and their interaction are still unexplained. In this respect, predictions about the possible collapse of China may also be a form of reputation management - statements that those concerned can refer to in the event of corresponding political developments.

  3. Chinese commentators often react ironically to the conclusions drawn about the collapse of China, dismissing them as "America's wishful thinking", as "a fantasy that just doesn't want to die." They view the high costs of the Chinese economic model quite critically, "Western analyzes", so the charge, but always contained the usual complaints about the interventionist role of the state. “Sorry America, but China will not collapse!” Is the seemingly self-confident answer that can be understood as part of a long-standing self-assertion discourse against a “West that is hindering the rise of China”.

China under pressure to adapt

As a result of its economic development, China is struggling with numerous difficulties today: urbanization, demographic change, a weak social security system, an educational system that is insufficient for the qualification of workers, regional inequalities, income disparities, ethnic conflicts, ensuring the access to resources required for economic development and coping with Environmental degradation and climate change are long-term challenges. New social classes have emerged, attitudes and values ​​are changing. Social tensions, which are the result of a variety of conflicts of interest and distribution, but for which there are no sophisticated instruments to deal with them, are often expressed in protests. From an economic point of view, the Beijing leadership would like to convert China into a service and consumer society. Politically, the party state is under constant pressure to adapt due to the demands of a differentiated and mobile society, integration into global economic structures and the demands of the international community. This also harbors the risk of conflict between opponents and supporters, winners and losers of the various restructurings.

Economic renovation

As a result of its integration into global economic processes, China has become vulnerable to weak demand on the world market. Due to demographic change and the resulting rising labor costs, the economy is losing competitiveness. Many Chinese state-owned companies are considered inefficient. The financial sector is in need of reform, the currency sector and the stock market have raised doubts about the state's control competencies in recent months. The investments directed in the expansion of the infrastructure to stimulate the economy only pay for themselves slowly and only where they are not based on bad planning. Overcapacities must be reduced in numerous sectors such as steel and chemicals. China has some catching up to do in terms of expanding the service sector and urbanization, which is why these areas are considered to be growth engines. The Beijing government wants to make companies more innovative. However, structures and mechanisms that promote and enable innovation must first be developed in the Chinese context. In addition, the domestic market is to become an alternative to the slowdown in exports. However, this requires logistics structures that only develop in accordance with demand. Overall, China is in a state of structural change. This is associated with a change in foreign trade and a slowdown in high growth. It is positive that, according to current data, the internal market is getting stronger and the service sector is being continuously expanded. This creates jobs that are needed to compensate for declining branches of industry.

Political corrections

The rapid growth phase demanded enormous social, ecological and economic costs from China and caused social dissatisfaction in many areas. The political leadership is confronted with growing expectations and demands of the population. The state has to deliver, but is in the process of restructuring in many areas and is not yet ready to deal with all the problems that characterize modern industrial societies. Decentralization and deregulation have resulted in fragmented administrative structures, so that responsibilities, resources and competencies are incoherently distributed between the national and the numerous local levels. Everyday reality thus stands in contrast to the popular image of authoritarian effectiveness.

Xi Jinping's new leadership emerged from a delicate compromise between different wing of the party. She sees the key to consolidating power in strengthening central government authority. Newly created leadership groups for central policy areas are an organizational reference to this. The state should also become more efficient. The anti-corruption fight is just as useful for disciplining the party-state actors as it is for demonstrating the political ability to act against a population that has named rampant corruption as a central deficit for years. Many people therefore have sympathy for the current campaign against corruption. But the Chinese way of fighting corruption has always led to an economic slowdown. Economic decisions are made more hesitantly, if at all, due to uncertainty about acceptable procedures - with unfavorable consequences for the granting of permits and the implementation of investment projects. Many observers assume that the legitimacy of the Chinese leadership is based solely on economic performance. However, in addition to good economic results, positive developments in education, environmental protection, clarity of laws, the fight against corruption and the reduction of inequalities perceived as unjust are issues relevant to legitimation. As long as the government shows the will to reform and the ability to act in these areas, popular support is likely.

The repressive action against intellectuals, artists and lawyers is, among other things, an attempt to reduce the polyphony of the internal Chinese debate and to guarantee the leadership the authority to interpret. Xi Jinping's “Chinese dream” is the key to a successful China. But the “socialist core values” summarized with the keywords prosperity, democracy, courtesy, harmony, freedom, equality, justice, rule of law, patriotism, devotion, integrity, friendship do not seem like a coherent vision but like patchwork. If politics is not just crisis management, but also an offer of order, then diffuse references to pride in Chinese culture, history and tradition can be seen as an indication that it is unclear what a modern China stands for - an effect that affects all areas of life pervasive change, which cannot be overcome constructively by enclosing critical debates either.

Risks

States break up when the political elite splinters, there is a lack of social cohesion and economic problems arise that have a negative impact on the availability of state resources. Weak, failing or crumbling states show failures in the areas of security, welfare and legitimacy to varying degrees. Instability arises where contact between the political leadership and the population is lost and citizens no longer trust the government.

A variant of the Chinese failure would be a stabilization or intensification of a repression that prevents a societal consensus on the priorities and goals of further development. Another would be the stabilization or expansion of political-economic power cartels that China share among themselves as spoils. All of this would remove the political leadership from society in the long run. A third danger lies in the fragmentation of the political leadership, which cannot be ruled out and which can be sparked off by differences over political content, economic crises or the handling of protests. Fourth, a progressive personalization of power would also make the party state more vulnerable - especially with a view to a later political successor for Xi Jinping. A fifth variant is external destabilization.

Stabilizing factors

The success of the Communist Party in founding the People's Republic lay in its ability to establish a strong state as an organizing and mobilizing agency to defend national independence and modernization. The party did not break because of the following dramatic mistakes. The state apparatus went through a major change from 1978 onwards. In a positive way, he is characterized by the ability to learn, development orientation and the freedom to react flexibly to acute challenges. It is also largely equipped with qualified staff who are informed about the concerns of relevant social groups. On the one hand, this means that the political leadership is able to act and steer, and on the other hand, the many people in charge in politics, administration and state-owned companies have a high level of self-interest in maintaining the existing structures.

Many people in China share the feeling that the political leadership around Xi Jinping is firmly in the saddle and is tackling the pressing problems with penetration. In this respect, as studies show, the headquarters in Beijing definitely enjoys the trust of the majority of the population. Due to the many negative experiences with upheavals and discontinuities in the course of recent Chinese history, “stability” is a central political goal in the eyes of many Chinese. While Western democracies are often perceived as chaotic due to the open handling of conflicts of interest, the unideological balancing of the government between reform, development and stability finds approval in many parts of society. With the development of such socially divided thought patterns, which also extend to nationalistic tones and are reflected in government currencies such as the “Chinese dream”, the political leadership tries to create a climate of political opinion that is favorable to them.As long as the party state reacts to the pressure to change and is headed by a management team struggling for compromise and consensus that is ready to moderate between the various interests and views of society, it can be assumed that it will prove to be relatively stable. It is to be hoped that this also includes the interests of the various ethnic groups and the relationship with Hong Kong. In addition to these "soft" factors, the political leadership is also ready and able, with the help of a security apparatus, to prevent the escalation and spread of protests in an emergency and to prevent political alternatives from emerging.

conclusion

China plays an important role in the current German export structure and is needed as a partner in dealing with global political challenges. The country is currently undergoing a double transformation in terms of its economic model and the processing of the change in leadership. Mind games about a collapsing China, possibly carried by a subliminal satisfaction about the supposed victory of the West or the higher value of Western democracies are of little help. Anyone who considers the collapse of China to be possible should make preparations based on good analyzes, because an incapable of action, possibly collapsing China would have enormous consequences not only for the German economy. Those who consider further stable development likely should look for constructive approaches to working together on the basis of common interests. Germany and Europe should be prepared for the various possibilities, because the future of China will remain one of the global uncertainties.

Prof. Dr. Anja Senz is professor for transcultural studies with a focus on economics, politics and society in China and East Asia at the Institute for Sinology at the University of Heidelberg.

Copyright: Federal Academy for Security Policy | ISSN 2366-0805 page 1/5