A declining Chinese economy should be more a cause for celebration than despair
How reliable are China’s GDP numbers? In a country where delivery drivers with fake licenses can fill up their fake-brand motorbikes with fake petrol before delivering fake products to their customers, one would be forgiven for questioning the government’s official data. In most countries GDP is the sum of all produced final goods relative to their price, China ostensibly adopted this approach in line with UN guidelines in 1994 but when scrutinised the data appears somewhat suspect. One reason for doubt is the CCP’s annual party meetings where GDP targets are announced, only for the growth rates to magically appear in the next quarter. Market disturbances in some aspects of the economy are also rarely reflected in the country’s overall data, all of which have always seemed a little too good to be true.
Not only has the CCP had to issue several corrections to its data (months after its official reporting), but former premier Li Keqiang – the man who was officially in charge of the country’s economy – was caught in a leaked US Diplomatic conversation in 2007 saying that Chinese GDP figures were quote; ‘manmade’ and ‘unreliable.’ He went on to say that he used proxy measures like electricity consumption, rail transport, and bank repayments to estimate growth.
Similar methods are often used by private hedge funds trying to encourage investors to pool money into China. When analysed, they tell quite a different story from the official reports. One study on satellite luminosity data predicted that China had overestimated its GDP numbers by up to 65% between 1992 and 2006. Another found that the economy grew by only 2.9% following the 2015 aftermarket sell-offs, and other electricity consumption models found that GDP should have actually decreased in the late 1990s for a brief period. Other estimates however like Bloomberg’s found that the GDP figures were only off by a few percentage points and were still broadly reliable. Consumption models can never paint a full picture, and low-level cadres are always under pressure to report good news to their superiors lest they be stripped of their positions. What this reveals is that while China still grew enough to give returns on investment, it experienced several economic downturns that it tried to hide from global markets. Almost all these studies also agree that China exaggerates its GDP numbers, the question is how much they do so.
This gives us all the more reason to be somewhat sceptical of the 6.5% growth figure currently being touted by the CCP while almost all other economic indicators seem to be ringing alarm bells.
During the last month, China has seen exports fall by 14.5%, imports fall by nearly 3%, youth unemployment rise to 21% (before further reporting was frozen), foreign investment drop 50% since April, and now price deflation set in at 0.3%. This is all occurring during the ongoing decline of the real estate sector which has seen Evergrande and other firms file for bankruptcy in the US just in the last few days.
If the CCP were massaging its data it makes sense that foreign investment, as well as exports, and imports, would show up first as these figures are more easily tracked by outsiders and don’t need to be tested against annual party targets.
Despite the warning sirens, there are some economists who have urged caution in declaring the end of the Chinese Century prematurely. After all, one or two months of bad data is not a death knell. Nicholas Lardy, who in 2018 wrote a book warning of China's economic imbalances believes that the country is simply going through a slower-than-normal Covid recovery because of its extraordinary lockdown measures and real estate problems. While it may take time to recover – he writes in a recent article for the Peterson Institute of National Economics – it will likely return to some kind of stability soon enough.
It may be true that after years of COVID obfuscation, wolf warrior diplomacy, and blatant espionage, the media (and the general Western public) is primed to exaggerate negative news coming from China, and are happy to run with a collapse narrative. The reality may be that the country can simply muddle through and carry on, albeit with more sluggish economic growth.
But perhaps the most interesting thing about the economic crisis is how little the leadership has responded to it, apart from a few cutting of corporate taxes. The party seems paralysed to respond in the way of actual policy.
Xi Jinping, the man in the high palace himself, appears not overly concerned with such economic voodoo. Stating that China’s most significant concerns were ‘food security’, ‘having patience”, and that Western countries were in trouble because of their ‘materialism and spiritual poverty.’ the stalwart leader also said that young people shouldn’t be above working in rural areas and that generals should show the ‘urge to fight’. If you think that an economic downward spiral might be counterproductive to these goals, then you probably didn’t grow up in a Maoist labour camp.
Black Swans and Grey Rhinos
Some of China’s current economic problems were entirely predictable. Xi himself used to mention the need to look out for ‘Black Swans’ (unpredictable calamitous events), and ‘Grey Rhinos’ (problems that are obvious but become dangerous when ignored), which makes it all the more ironic that so little was done to prepare for these exact phenomena.
One enormous Grey Rhino known for a long time was the middle-income trap. As millions of Chinese were urbanising the economy kept growing, but eventually, the economy would have to shift to a consumer-driven one where people spent more money on cars, clothes, and gadgets. Facilitating this trend was, in fact, one of the CCP’s many economic priorities, the problem was that in 2015 the Chinese stock market took a severe downturn (likely caused by the loosening of stock selling laws as the RMB was internationalising), the solution according to Xi Jinping, was to force China’s more productive tech companies to merge with smaller ones, hoping that they would absorb the special economic sauce that would propel them to super-productivity. The predictable result was a loss of market efficiency, bad credit loans, and virtual monopolisation of the market that decreased consumption.
The second massive Grey Rhino that the Chinese government not only ignored but spent many years poking with an electric prod was demographics. Revised figures revealed that the country’s young population was already declining in the early 2000s and has continued ever since, with the last 7 years being particularly bad. This is partly a result of urbanisation but much of it is spurred by the break-neck “996” work culture and lack of social safety nets which means young people are expected to support both their parents on a meagre salary.
This leads us to the biggest Grey Rhino of all which is corruption. One of the main reasons the Chinese public doesn’t consume enough is the peculiar way the economy grew in the last few decades. The distorting web of connections maintained by the CCP meant that GDP was carefully siphoned into the pockets of party members and a cohort of elite businessmen so that while the economy surged, the wage increase was relatively mild. One shocking statistic is that 80% of the national healthcare budget is funnelled into only 10% of hospitals not accessible to the general public. Instead, they are reserved only for high-ranking party members, one of many such privileges enjoyed by the CCP elites. This corruption more than anything is the reason for the slowdown and the hopelessness among the Chinese youth. On the more extreme end of this spectrum is the phenomenon of mass suicides emerging in the last few years, like one group of eight adolescents that killed themselves by drinking poison on the Beijing subway.
The three Grey Rhinos of consumption, demographics, and corruption were then met with the ultimate black swan event in 2020 with Covid, and three years of a failed policy response has now proven to be the nail in the coffin for an already failing economic model. The bigger picture however is that in the 2000s China had presidential term limits, a mostly independent monetary policy, and a benign international outlook, but under Xi, none of those things remain.
Perhaps Xi is too preoccupied with his latest rounds of military purges to worry about what the stock market says. The heads of the rocket force and other generals recently disappeared overnight with various excuses such as ‘work stress’ and then ‘suicide’ being trotted out. Though reasons for purges are always speculative, it’s hard not to imagine that Xi’s paranoia isn’t fueled by a hunt for his own Prigozhin lurking within the PLA.
The amusing thing about the downturn is that it has all been despite Washington’s best efforts to the contrary. Only a few months ago US Secretary Blinken was eagerly in Beijing warmly talking about economic cooperation between the two countries, signalling for investors to pile in. Unfortunately, the average US pension manager no longer shares the enthusiasm of the American government. The Biden admin appears to believe that the more they engage economically with China, the more they can delay potential military action in Taiwan, as they’re a little busy with Ukraine and would rather wait until the island territory has more time to prepare. This was succinctly elicited by Biden himself last week with the line “They have got some problems. That’s not good because when bad folks have problems, they do bad things.”
The C-Day Warpath
With the lives of millions of Taiwanese hanging in the balance, it’s important to examine this question. Is it true that a bad economy makes China more likely to invade Taiwan?
The data on this is rather mixed. In the golden age of dictatorships in the mid-20th century, economic successes (or so perceived) often precipitated a military power grab. In other cases, it was economic woes that caused them to look for a distraction.
Since 1945, there have been a number of invasions or annexations of territory where a dictatorship has attempted to completely remove a non-aggressive government (i.e. a government that was not attacking or threatening to attack another country) from power. If one can forgive ponderous lists, then the results are worth paying attention to:
Russia’s invasion of Ukraine (2022), Serbia’s invasion of Bosnia (1999), Iraq’s Invasion of Kuwait (1990), Iraq’s invasion of Iran (1980), Argentina’s Invasion of The Falklands (1982), The Soviet Union’s invasion of Afghanistan (1979), China’s invasion of Vietnam (1979), Vietnam’s Invasion of Cambodia (1978), Libya’s invasion of Chad (1978), Indonesian invasion of East Timor (1974), the Turkish invasion of Cyprus (1974), Egypt’s invasion of Israel (1973), The Soviet Union’s invasion of Czechoslovakia (1968), Indonesia invasion of New Guinea (1961), The Soviet Union’s invasion of Hungary (1956), North Vietnam’s invasion of South Vietnam (1955), China’s invasion of Tibet (1950), and North Korea’s invasion of South Korea (1950).
It should be noted here that such methodologies are complicated as sometimes countries invade in order to establish buffer states and economic data can be hard to come by. With that aside, looking at the proximal economic data, 10 out of the 18 invading countries (USSR (1959, 1968, 1979), China, Libya, Indonesia (1974), Turkey, Iraq (1980), Egypt, North Vietnam) actually saw positive economic growth in the five years leading up to their invasions while only 8 out of the 18 (Russia, Serbia, Argentina, Iraq (1990), Vietnam, China, Indonesia (1961), North Korea) saw declines. In other words, economic performance is not a good predictor of military offensives.
This makes sense as basically, a dictator can argue the case in both ways, either we should invade now while we still have the economic clout to fund a war, or we should invade later and wait until the economy is in better shape. What calculations are being made in Zhongnanhai is impossible to know for certain.
While economic declines are not always correlated with military invasions, they are correlated with coup d'états and violent protests. Coups are associated with weaker GDP per capita, reliance on single exports, and large military spending as a percentage of the budget. Protests meanwhile are often correlated with wage decline, youth unemployment, and corruption, all of which are conditions now surrounding the PRC with increasing acuteness.
Maybe this is all just wishful thinking. While Russia since the Soviet takeover in 1917 has experienced no less than three coup attempts and two forcible transfers of power, China’s PRC has only experienced one officially recognised attempt with the Lin Biao Incident in 1971 with no successful coups in its history.
Perhaps a more useful exercise when it comes to deterrence is to look at the invasions that didn’t happen, or rather invasions that were planned or threatened but never actually came to fruition. As Henry Kissinger noted, the foreign policymaker is always a tragic hero. He can never prove that he averted a crisis that didn’t occur and he can always be blamed for those that did, but despite the difficulty of alternative history, there are examples of cancelled invasions that are well documented.
World War 2 involved a plethora of abandoned occupation plans as the war changed course. In the closing days of the war, the Soviet Union invaded Manchuria and several small Japanese islands. They then drew up plans to conquer most of Hokkaido, Japan’s northern island, which was considered necessary to secure these new acquisitions, and even continued fighting after Japan surrendered unconditionally. The plans were only abandoned because they were fiercely opposed by Harry Truman, and violated agreements the USSR had already signed in Yalta.
A few years later in 1951, there were alleged Soviet plans to invade Yugoslavia following the Tito-Stalin split, where Stalin’s paranoia led him to fear a Western invasion supported by the Yugoslavs. The Soviets attempted at least one coup in 1951 and were then working on assassinating Tito before Stalin died in 1953. Tensions flared up again in 1971 and after a domestic terrorist campaign, the Soviets considered another military intervention. According to Yugoslav documents; the decision not to intervene was made because the smaller nation had cultivated a series of alliances with Washington and China that made the Soviets worried about reputational damage. What these two episodes show is that an alliance system and diplomatic efforts can successfully disarm a conflict even with great powers, but it must be backed up with the credible use of force.
Sometimes conflicts are averted through sheer blind luck. One such instance was the planned invasion of Chile by Argentina in 1978. After the discovery of oil fields near the Antarctic, the Beagle Islands in Southern Chile became a matter of political importance. Argentina amassed huge numbers of troops along the Chilean border and drew up invasion plans of the territory after a tribunal awarded the islands to Chile. In a case of divine intervention, a turbulent storm struck and the operation had to be postponed, which gave the Chilean military time to bolster defences and plan a counterattack. Pope John Paul II then personally intervened and requested to arbitrate between both countries, so the invasion was cancelled. We still don’t know the exact reasons the Junta cancelled the plans, but in this case, the will of God seemed to be a pivotal factor.
In yet other examples, overwhelming military force was the key deterrent. This includes Sadam Hussein’s planned invasion of Saudi Arabia after he successfully annexed Kuwait in 1991. The Iraqi military amassed troops along the Saudi border as the Kingdom called for the US to intervene. During Operation Desert Storm, Sadam even captured a Saudi border town before his soldiers were quickly demolished by coalition forces. A similar example is North Korea, where after the Korean War stalemate the North continued to develop plans to occupy the South. The construction of tunnels under the DMZ in the early 70s, coupled with the Blue House raid attempt to assassinate the South Korean president in 1968 all point to a planned incursion. We can surmise that these were never realised thanks to the presence of the American military.
What these examples reveal is that deterrence is effective when there is an overwhelming military response, when conditions are judged to be far more difficult than first anticipated, or when there is an alliance network that guarantees support from nearby nations. In this case, Taiwan is a complex case, because, unlike previous examples, the PLA has the ability to blockade it and completely cut it off from supplies of aid or weapons, and while its potential alliances include sea navigation, they do not yet include the defence of Taiwan itself.
If we pay attention to Xi’s actual words, it seems he really doesn’t pay the economy too much mind. He’s far more concerned about discipline in the party, particularly the military and has made multiple speeches designed to prepare the country for war. This coupled with CIA intelligence and a leaked map showing highways connecting Taiwan to China in 2030, points to a 2027 or later date for a Taiwanese invasion, which would also align with the beginning of Xi’s fourth term as Chairman of the CCP. His speeches and actions reveal that he is more than willing to sacrifice the economy for national security. To the outside world, Xinjiang and Hong Kong look like terrible exercises in human rights abuses and mass imprisonment, but to Xi, they look like immense successes, because in his ideology, this is simply a necessary part of China’s reemergence as a predestined great power.
What all this means is that a worse Chinese economy is likely to make it harder for Xi to achieve his goals of conquest which is entirely a good thing for the world. The more the government’s attention is on domestic problems, the less it is focused on invasion, but more crucially, given the fact that Xi seems already decided on invading, the policy should be to weaken the effectiveness of the military and increase the chances of him being removed from power. The deciding factor will be how ready Xi feels the military is, and how well-armed Taiwan is when that day comes. Increases in rhetoric, fighter jet sorties, military drills, and spending, all point to an intervention in the next four to ten years, and when that day comes, the Western world had better make sure Taiwan has what it needs, and as NATO’s attention shifts further east, they may find it preferable to face an economically struggling China, than an economically confident one.