A large number of Western news media and pundits, particularly those in the United States, have been predicting China’s economic collapse for years. Mainstream US newspapers such as the New York Times and Washington Post have reported for more than 30 years that the Chinese economy will collapse or drown in a sea of debt. Gordon S. Chang wrote in his 2001 book, The Coming Collapse of China, that the Chinese economy would falter in 2011. The Nobel Prize winner, economist Paul Krugman, wrote in the New York Times in 2015 that the “emperor wears no clothes,” a reference to Chinese authorities’ handling of the stock market crisis that began in June of that year.
Instead of collapsing, China’s economy continues to grow at more than 6% annually since 2015. Admittedly the rate is less than the almost 10% annual growth rate from 1980 to 2014. But it outstrips the West whose annual growth rate is estimated at less than 2%.
China’s rapid economic growth has had an unprecedented impact on the country and the world. After lifting more than 700 million people out of poverty, the government is on track to meet or exceed its target of eliminating poverty by 2020. China became the world’s second largest economy, becoming the world’s biggest source of tourists (120 million) and foreign students (one million) and buyer of natural resources (40 % of iron ore, copper, energy resources). The growing middle class became the largest buyer of Western and Japanese luxury products. More important, relevant 2016 statistics indicate the economy will likely meet the government’s annual target growth rate of about 6.5 % this year and beyond. The Purchasing Managers’ Index rose last year above 50, 13 million jobs were created and 12 million more people were lifted out of poverty
The economies of India, Indonesia, and other developing countries have not grown as fast as China because of the difficulty of reaching a consensus on policies. Their GDP as a percentage of the rest of the world has not changed since gaining independence. The Indian economy accounted for more than 3% of world GDP in 1947, but that figure declined slightly in 2016, albeit claiming to overtake China as the world’s fastest-growing major economy. But the World Bank says India has the world’s largest population living in poverty, and almost half of Indian homes are without an indoor flush toilet.
The critics’ proposition that the Communist Chinese can’t think outside the box is wrong. China’s economic development history and achievements show that the Communists might be more efficient than Western economic policy planners. The Chinese approach to economic development — pragmatism, experimentalism, gradualism and authoritarianism — is largely responsible for the country’s prolonged period of high annual rates of growth. Unlike Eastern European or Soviet Union Communists, Chinese leaders from Deng Xiaoping to Xi Jinping were pragmatists rather than ideologues, choosing platforms that work (it doesn’t matter if the cat is black or white as long as it catches mice).
For example, the leaders experimented with the “household responsibility” system, allowing farmers to lease commune land to grow and sell produce in Sichuan and Anhui provinces. Once the experiment proved successful, it was gradually extended to the other parts of the country. The successful rural “capitalist” experiment was extended to urban areas, allowing the establishment of small privately-owned businesses. It could be argued that rural and urban experiments of free enterprise were largely responsible for China’s sustainable economic growth. Authoritarianism was not used to suppress human or religious rights but to give the government authority to implement effective and timely policies. Without authoritarianism, the government could not have implemented the huge stimulus package of US$550 billion to reverse the downward trajectory (from 6.5% in 2008 to 9.2% in 2009) caused by the 2008 financial crisis.
It should also be noted that the Chinese government is a meritocracy in that the leaders were selected and elected on the basis of competency and accomplishment. Young cadres entering public service were monitored by the Organization Commission. Those who demonstrated competency and resiliency were promoted and given greater responsibilities. The best and brightest were selected and elected to the Politburo and finally to the Standing Committee.
During the last four decades, the economy has amassed a huge financial toolkit: more than US$20 trillion in deposits (capital formation) and US$3 trillion in foreign reserves. IMF and World Bank statistics show that total Chinese government (central and local) debt to GDP is less than 50%, favorably compared with that of the West, estimated at nearly 100%. Chinese consumer debt-to-disposable income is less than 40%, compared with more than 100% in the West and Japan. Further, the Chinese middle class, defined as those earning from US$8,000 to US$36,000 a year, will account for almost half of its 1.36 billion population by 2020. Last but not least, China’s One Belt, One Road trade initiative will likely boost its export industries. Indeed, the more than 60 countries participating in the initiative reached a two-way trade of more than US$1 trillion in 2016. These statistics indicate that China has considerable fiscal and spending power to spur and sustain economic growth.
On China’s rising corporate debt, more than 65% of loans were made to state-owned enterprises (SOEs) by state-owned banks (SOBs), pointing out the unique situation in which the lender and borrower belong to the state, which is defined as the people. Being shareholders of SOEs and SOBs, the people ultimately gain. It could, therefore, be argued that lending money to SOEs to sustain production and employment is economically, politically and socially desirable. China’s central bank says non-performing loans as a percentage of the total was 1.7% at the end of 2016, a figure favorably compared with the West.
Finally, local governments are not what they appeared, in that indebtedness were loan guarantees, with the land they owned as collateral. Much of China’s infrastructure and housing construction are private-public partnership ventures. To secure a loan guarantee from local governments, private developers must front the required capital. In the event of a payment default, the local governments would seize the upfront capital. Banks lending the money are owned by the local governments.
In light of the above details and given the government’s track record on reforms, there is no reason to believe the Chinese economy will collapse anytime soon.