China’s economy is in trouble.  It was just a few years ago that I wrote a post about how China had “lifted 850 million people out of poverty” with a sizzling growth rate of about 9% for the first two decades of the 21^st century.  But these days, the picture is very different.  The official GDP growth target for this year is “around 5.5%,” and many in China are worried the final number will be even lower.

As the New York Times summed it up a few weeks ago: “Consumers are gloomy. Private investment is sluggish. A big property firm is near collapse. Local governments face crippling debt. Youth unemployment has continued to rise…”  The Washington Post added a list of some immediate results: “Teachers say they’re not getting paid. Motorists say they’re paying more for parking. More and more cities are even auctioning off public services like school lunches, shared bicycles and operating rights for vendor stalls and sightseeing carts.”

For the last few months, op-ed writers have been elbowing each other out of the way to express conflicting opinions about what this means.  Some fear the consequences, like the Washington Post opinion columnist who predicted that “China’s economic slowdown could cause Xi to pursue more authoritarian and militaristic policies — even an invasion of Taiwan — to contain rising domestic discontent.”  I side with the more optimistic view expressed by Paul Krugman, winner of the 2008 Nobel Memorial Prize in Economic Sciences: “America’s exposure to a potential China crisis is surprisingly small.”

Today’s economic challenges are a result of the strategy China used to propel its rapid growth:  borrow and build.  When the economy slowed down, the government simply underwrote construction of more airports, more highways, more shopping malls, and more cities.  Not to mention the longest high speed rail system in the world (over 1,400 miles), and more. 

But they got a little carried away.  The best known examples are China’s “ghost cities,” with “at least 65 million empty homes — enough to house the population of France.”  China also “has enough unused factory capacity to make more than 10 million cars (sufficient to supply the entire Japanese car market—twice).”  At least 100 of their airports “are grossly under-utilized… and many highways are mostly empty of traffic.”

How did they pay for all this?  The same way many people in the US have paid for their remodeled kitchens and exotic vacations:  they borrowed.   According to the International Monetary fund, China’s $47.5 trillion total debt now represents about 250% of GDP, which is similar to the US.  Even more troubling part is the fact that local governments owe $9 trillion in “off-balance sheet debt.” These are “non-performing loans” (a polite term bankers use when borrowers stop making payments).  The solution with Chinese characteristics has been to make banks look more solid, hiding these nearly worthless loans by moving them “to the balance sheets of entities specifically created to absorb non-performing loans.”

“At the core of China’s current economic trouble is real estate…” according to the New York Times.  “[It] represents a quarter of the country’s economic output and at least three-fifths of household savings.”  But in the last two years “companies accounting for 40 percent of Chinese home sales have defaulted, according to Reuters. As a result, many homes have been left unfinished and suppliers and creditors left unpaid.” That may not mean a lot to the global economy, but it is a matter of financial life and death for many citizens.  As a result, “Protests broke out in more than 100 cities last year as mortgage owners demanded that developers finish the apartments they had already paid for, sometimes years in advance.”

Demographic trends represent another fault line that threatens China’s future.  According to one Washington Post columnist:  “Last year, the country’s population fell for the first time since 1961… The United Nations projects that the country’s head count will plummet from today’s 1.4 billion to below 800 million by century’s end. You have to go back to the plagues and famines of the late medieval period to find a loss of population so severe.”

With fewer workers, the economy will grow more slowly.  In addition, the columnist continued, people are living longer, and the number of elderly people represents a growing portion of the population, who will need more government support.  The columnist went on to note that protests have already begun, including “this year’s street protests against medical insurance reforms by tens of thousands of seniors in Wuhan and Dalian.”

At least part of this demographic predicament was self-induced.  In 1980, China tried to reduce the number of hungry mouths to feed with a strict “one child policy” which was harshly enforced.  By 2016, the harmful effects were so obvious that they finally changed this to a “two child policy,” and in 2021 to a “three child policy.”

But the damage had been done, especially when it was combined with the fact that China has become “one of the world’s most expensive places to raise a family… [creating] legions of stressed young couples who don’t want to make babies.”

And that’s not the only stress faced by young adults.  In June, the unemployment rate for this group hit an all-time high of 21%.  In a shocking turn of events, in August “a spokesman of the National Bureau of Statistics of China announced that the publication of age specific unemployment data, including youth unemployment data, would be temporarily suspended.”  The official explanation was that the statistical methodology for analyzing this data needed to be improved.  The unofficial explanation was that the government is lying.  One Peking University professor “estimated that the unemployment rate among youth ages 16 to 24 could be close to 50 percent, more than twice the official figure.” 

And for those who do find a job, life is not exactly a bed of roses.  Another Washington Post columnist recently wrote that “Young people who do find work are often subject to grueling 72-hour workweeks and burnout. A rash of media stories reports that many 20-somethings are dropping their careers to become ‘full-time children,’ meaning they’re exiting the formal job market and receiving a stipend from their parents to focus on chores and other filial duties… [In response], Chinese leadership has basically told young people to stop whining and ratchet down their expectations. In the words of Xi Jinping, young people must learn to ‘eat bitterness’ (an idiom that roughly means to toughen up by enduring hardship).”

How did this happen?  According to Axios, “the high unemployment among urban youth is caused in part by a ‘college bubble,’ meaning there are more young people earning college degrees than there are skilled jobs for them to fill.”  Hmm.  Where have I heard that before?

Another downward economic force is the fact that most Chinese are not consumers by nature.  Rather, the culture favors saving.  As a result Chinese banks have assets of $50 trillion, which equal 300% of its GDP.  This savings rate is four times larger than in the US, where bank assets equal 75% of GDP.  (This is such a fascinating cultural difference that it will be the topic for a separate “five-minute summary” in the next post in this blog.)

So what does this all mean?  If you live in China, it’s not good.

Since Mao died in 1976, the Chinese Communist Party has promised its citizens increased prosperity if they just toe the Party line.  But for the next few years or decades, it looks like that deal is no longer on the table.  “Instead,” according to The Guardian, “the government is offering a nationalist, security-based vision of stability, with the economy paying the price if necessary.”

If you don’t like that deal, according to a recent article in The Atlantic entitled “The China Model is Dead,” the government’s “message to the public is, essentially, ‘suck it up.’”  Or, as Xi himself more diplomatically put it in a recent speech: “We must maintain historic patience and insist on making steady, step-by-step progress.”

For those of us lucky enough to live outside China, there is little threat that China’s economic problems “will spill over in a major way to the rest of the world [including] the United States.” again according to Paul Krugman.  “Big as China’s economy is, America has remarkably little financial or trade exposure to China’s problems.”

Some experts, like the Washington Post columnist quoted at the beginning of this post, fear that if things get bad enough, the Chinese government may invade Taiwan to distract people with a wave of patriotic fervor.  Sort of like the plot of the 1997 movie “Wag the Dog.” 

Fortunately, President Joe Biden is not one of them.  Two weeks ago, at a press conference at the G20 summit meeting, he said that “One upshot of China’s economic downturn [is that]… Beijing is [actually] less likely to invade Taiwan” due to its reduced capacity.

I sure hope he’s right.