Xi Jinping will make the West pay for China’s economic collapse
It used to be said that when America sneezes, the rest of the world catches a cold. The same might now be true of Beijing
JEREMY WARNER14 February 2024 • 6:00am
China’s economic woes will not derail Xi’s geopolitical ambitions CREDIT: CARLOS BARRIA/AFP
China’s economy is imploding, prompting much schadenfreude from Western commentators delighted by the turn of events. The wait for today’s denouement has been a long one.
For decades, China defied the laws of gravity, confounding all predictions of imminent collapse. The confusion of democracy, it seemed, was no match as a form of economic governance for the planned certainty of authoritarianism.
Yet driven by a devastating combination of structural and cyclical faultlines, disaster seems finally to have struck. Serves them right, and proof positive that autocratic regimes are always destined to fail, is the general tone of the commentary.
It’s only natural to gloat after all the years of being lectured on the decadence of our own Western decline, which by the way, we hardly need reminding of.
Yet we should be careful what we wish for.
China’s problems could very soon become our own.
For more than a century now, the old saw that “when America sneezes, the rest of the world catches a cold” has been a remarkably accurate guide to what’s about to unfold elsewhere.
What happens in the US inevitably washes up on Europe’s shores six months to a year later, and sometimes, as occurred with the financial crisis, almost immediately.
In recent years, however, the US has been joined on the world stage by another 10-ton gorilla, throwing everything out of kilter. The way things are going, we should perhaps be thinking more in terms of “when China sneezes….”
It has long been obvious that China has entered a period of much slower growth. Chinese statisticians and party apparatchiks have worked tirelessly to disprove this reality, but even among the regime’s most supportive Weibo cheerleaders, it must by now be impossible to ignore the evidence of their eyes.
In part, it’s just simple mathematics. The larger an economy gets, the more difficult it becomes to sustain past levels of growth.
The comedown is nonetheless proving politically punishing for a regime which has for decades thrived on the apparent development miracle it has engineered. The promise of ever-growing prosperity is the glue that keeps Xi Jinping in power. Worryingly – and it happens to all totalitarian leaders – he must now find other, less benign, pursuits to unite the nation.
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China’s economic travails already find their expression in rising geopolitical tensions, tit-for-tat protectionism and the advent of a new cold war.
The other likely consequence is that China will soon be directly exporting its economic ills to us here in the West.
There’s a parallel here with Covid, which relied on international connectivity to transmogrify from an apparent outbreak of influenza in Wuhan into a hugely destructive, global pandemic.
Similarly, China’s economic implosion threatens a worldwide
contagion of deflationary forces, spread from one country to the next via the transmission mechanism of global trade and finance.
For decades, China has remained largely immune to the ups and downs of the business cycle, with a rate of growth that has left Western economies standing.
In the 40 years up until the pandemic, China’s rate of growth was around three times faster than that of the US, enabling a breathtaking process of economic catchup.
When America and Europe caught pneumonia during the banking crisis of 2008-10, China sailed on regardless, apparently oblivious to the Western collapse.
“You were my teacher,” Wang Qishan told his then opposite number in the US, Treasury Secretary Hank Paulson. “But look at your system, Hank. We’re not sure we should be learning from you anymore.”
China’s advance was tolerated because it was thought that allowing China access to Western markets on equal terms would be as beneficial to us as it was to them, and in time would open the doors to China’s eventual democratisation.
The election of Donald Trump as US president ended an era of tolerance of China CREDIT: Carlo Allegri/REUTERS
It was all part and parcel of the “end of history” delusion, with Western mores and values emerging as the final winner.
All this came to an abrupt end with the election of Donald Trump as US president in 2016, determined to stamp out what he saw, with justification, as unfair Chinese competition.
In his mind, China had at America’s expense stolen, copied and subsidised its way to a position where it had become a direct threat to US geopolitical and economic hegemony.
Yet China’s current slowdown has very little to do with the souring of relations that followed Trump’s election. Far from it, China’s exports both to the US and Europe have continued to flourish regardless.
Neither Trump’s trade war with China, nor its effective continuation under his successor, Joe Biden, have had much effect on the overall level of Chinese exports to the US.
Nor has the wider breakdown in relations prompted by China’s complicity in the pandemic, the crackdown on the pro-democracy movement in Hong Kong, and
President Xi’s continued support for Putin’s invasion of Ukraine.
With a few exceptions, notably cutting-edge technology, business has continued as usual. The West can therefore not in any way be blamed for China’s present predicament, which is virtually all homemade. China’s carefully curated reputation for excellence in economic management has overnight been transformed into a picture of incompetently pursued make-believe.
How else to describe the so-called “three Ds” – debt, deflation and demographics – which have ruinously combined with a cyclical collapse in the property market and the related after-effects of Xi’s disastrous zero-Covid policy to produce a perfect storm of economic negatives?
China's price plunge
Line chart with 13 data points.
Annual Consumer Prices Index
View as data table, China's price plunge
The chart has 1 X axis displaying Time. Data ranges from 2023-01-01 00:00:00 to 2024-01-01 00:00:00.
The chart has 1 Y axis displaying %. Data ranges from -0.8 to 2.1.
Chart annotations summary
CHINA'S PRICE PLUNGE
Annual Consumer Prices Index
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End of interactive chart.
Not that the now all-too-obvious recession will be acknowledged in the official data, which will miraculously continue to conform with the government’s 5pc growth target.
But everyone knows the truth; the big end has gone on China’s growth engine – a largely unrestrained property market recklessly and lavishly fed by state-sponsored credit expansion.
If the effects could be confined to China itself, this wouldn’t from a Western perspective matter very much and might even be regarded as positively welcome if it helped to disarm Chinese expansionism.
Unfortunately, neither is true: China’s economic woes will not be confined to its own shores and nor will it derail Xi’s geopolitical ambitions, which may be further emboldened by the need to defuse internal unrest with the hate plank of a foreign enemy.
As for exporting China’s economic ills, this will come naturally through the deflationary forces that years of over-expansion have unleashed.
Consumer prices in China are already falling, and so are export prices as Chinese producers seek to dump great swathes of excess capacity on Western markets.
Western economies may be powerless against the deluge, given how dependent they have become on Chinese supply chains.
The inflationary problem that China sparked coming out of the pandemic, when it remained substantially closed for business even as Western demand came surging back, has reversed. Falling demand in China now threatens the West with an equally destabilising, deflationary doom-loop.
What a muddle the world economy has created for itself.
