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Is China Headed for a Crash?

Anyone who doubts the role of “Black Swans” in shaping the course of human events should pause to reflect on the decade just past. 9/11 and the recent global financial meltdown are precisely the sorts of big, disruptive developments that occasionally send history careening onto unforeseen paths, leaving the reputations of prognosticators and the best-laid plans of policymakers in their wake.

And yet, as important as they undoubtedly were, neither of these events seems to have disturbed what may well prove to be the master trend of the twenty-first century: the shift in the locus of global wealth and power from the Euro-Atlantic to the Asia-Pacific and, most importantly, the rise of China. That country’s ability to sustain near double digit growth rates for over three decades has sent it rocketing up through the ranks of the world’s largest economies.

Since it surpassed Great Britain in the 1880s, the United States has sat securely in the number one position. If it continues on its present trajectory then, by the middle of this century if not before, China will succeed in finally knocking America off its perch.

The precise implications of such a transition are uncertain. Even if China has a bigger gross domestic product than any other nation, its huge population means that it will remain, on average, relatively poor. Still, as was true for the United States in the late nineteenth and early twentieth centuries, and as is already clearly the case for China today, increasing wealth generally brings military power, political leverage, and diplomatic influence in its train. If China can stay on its steep upward track perhaps it really will eventually account for 40 percent of total world output (as one Nobel Prize-winning economist recently predicted). Under these circumstances it may not be so outlandish to imagine that China could, in the words of journalist Martin Jacques, “rule the world.”

Beijing’s handling of the current economic crisis has lent greater credence to these projections. While the United States and the other advanced industrial nations struggle to regain their footing and resume their previous growth paths, China seems barely to have lost a beat. This has encouraged a confidence bordering on cockiness in some Chinese commentators who now speak more openly of the possibility that they may some day share global leadership with the United States, and perhaps eventually surpass it.

Could there be a Black Swan in China’s future? A small but growing number of analysts and investors think that there may be a large one lurking just around the corner. In their eagerness to avoid a protracted slowdown, and the likelihood of heightened social unrest, China’s leaders have unleashed a torrent of money, pouring it into state owned enterprises or funneling it through banks to local governments. These, in turn, have used it to fund construction of yet more shopping malls, office buildings, highways, airports, and research parks. While they may be quite lucrative for the firms that do the building (and to the Party and government officials to whom they pay kickbacks in return for contracts), these projects are often redundant and wasteful—and they do nothing to correct a nationwide excess of investment in relation to consumption. The ready availability of credit is also fueling a real estate bubble that is starting to make its American counterpart look puny by comparison. In sum, the global economic crisis appears to have “heightened the contradictions” of China’s current growth model and may wind up hastening its demise.

Aside from its immediate economic effects, a deep and sustained recession would have far-reaching political and strategic consequences. The widespread loss of jobs and savings, coupled with bitterness toward corrupt officials who profit while others suffer, could trigger protests more widespread and difficult to contain than any China has yet experienced. The desire to deflect blame could lead to open splits among Party leaders and increased appeals to anti-foreign, hyper-nationalist sentiments that are already quite close to the surface of mass opinion. Desperate to create demand, Beijing might engage in “military Keynesianism,” accelerating and expanding its already ambitious arms programs.

The probability of these events may appear low at present, but they deserve more consideration than they have received to date. History rarely travels in a straight line for very long.