Economic growth at average annual rates of 10% or so in China for more than a decade has been one of the dominant sources of a huge decline in world poverty. China has had a very good run of economic management so good that it has won admirers among right wing politicians in the United States, despite the fact that it has a nominally communist economic system.
This good economic management may have something to do with the fact that 30somethings in their prime are making decisions that in the United States are currently reserved for septegenarians. Others see China and other booming East Asian economies as the poster child for the benefits of a merchantalist economic policy agenda, or weak intellectual property laws, respectively. Others have pointed to the ease with which unproductive workers can be punished simply by denying them raises in periods of rapid wage growth, rather than actually having to lay them off or cut their wages.
Consider, for instance, the city of Chongquig in Southwest China as city that was a capital of China once deep in history, where China's economic boom and state sponsored mass migrations of rural Chinese people into urban centers has turned over the course of a generation from a sleepy, rustic and poor provincial capital backwater - a Peoria or Albany of China, into a thriving modern, globalized city roughly the same size as New York City. Chongquig is no Potemkin village propped up artificially for external consumption. Few people outside China have even heard of it.
The shift of human capital from rural to urban areas that has driven economic growth in China exemplified by Chongquig is critical for China's economy, because its largest urban areas are dramatically more economically prosperous than its smaller cities and rural areas.
The extent to which vast numbers of people can viably live in a very small geographic area is greatly underestimated, so this is not a trend that exponential growth will lead to the inevitable end of any time soon. By comparison, agriculture's share of the U.S. economy decreases steadily every decade for a couple of centuries before finally pausing and even edging up a bit with the appearance of organic farming. Fully modernized agriculture doesn't require a very large share of an economy's people, and technology can sustain exponential growth for decades at a time.
China also has homegrown legal system unlike the clones of the British, French, German and Islamic legal systems that prevail almost everywhere else in the world except North Korea and Iran. Some of this unique legal system is post-revolutionary (i.e. developed since World War II), but some of it has ancient legal roots exemplified by Confucianism. China's unique legal system's role in the economy makes the applications of lessons learned in other economies only provisionally useful in China, however, and could help explain why it has not collapsed already.
But, China and South Korea are currently both in extreme manufacturing company bubbles. If I were invested in either, I would get out, or short the stocks, immediately. Because China is such an extreme outlier data point, it presents one of the most predictable drivers of other international economic trends in the medium term.
I went on record two and a half years ago, predicting a Great Depression class economic crash in China sometime between now and December 31, 2023, less than nine years from now, with a manufacturing bubble as one of the proximate causes of the collapse. The reasoning behind the tail end date was simple. Every industrialized company in the history of the world has had at least one Great Depression class crash during its period of industrialization but China, and this always happens before it reaches parity with the richest countries in the world. The year 2023 is a couple of years before a conservative estimate of when China would reach this level of parity if its growth continued unabated.
Recent data tends to suggest that the bubble will pop sooner, rather than later; more likely in this decade than the next. International economic bodies were starting to sound the alarm by the summer of 2013 (almost a year after my own prediction). Later that summer, Credit Suisse analysts noted a bubble in Chinese non-financial credit markets. China has massive amounts of bad business debt that has not been written off yet. An immense amounts of China's manufacturing capacity was idle last summer, two years after industrial overcapacity in key industries like iron and steel had already been identified as a critical problem with the Chinese economy, a situation which was the immediate impetus for my Chinese Great Depression prediction:
After 34 years of booming economic growth averaging over 9% per year (the longest sustained period of rapid economic growth in human history), China’s credit-fueled, investment-driven growth model is exhausted and increasingly unstable. . . . the Middle Kingdom’s credit boom is well past the point of diminishing marginal returns; and no one can deny that the misallocation is widespread, with capacity utilization now below 60%.The Consequences Of A Chinese Economic Collapse Could Change The World
The question of what will happen when an economic mega-power like China sees its bubble pop is deeply troubling.
It is possible that at least some of the investments China has made for the long run, like an immense investment in new high speed rail lines and cars (more than $300 billion U.S. dollars equivalent since 2004, about 0.5% of Chinese GDP), will pay off in the long run even after an economic depression, but it is also possible that these investments will wither and spoil in an economic counterpart of military overreach. (By comparison 0.5% of the U.S. GDP per year would be about $80 billion U.S. dollars per year; the U.S. has spent on average about $2 billion per year since 2009 on high speed rail and also hasn't made major investments in new airports, highways, seaports, spaceports, or other new transportation capacity).
Nothing that big can happen in a globally interconnected economy without having intense impacts on much of the rest of the world. For example, how will the fact that China has been the dominant financier of American's trade deficit and national debt influence the global impact of an economic downturn in China? What role will Chinese near monopoly on economically critical rare earth production have on the world economy?
In general, a massive economic collapse usually favors political extremism, massive political change, and often militarism. Intense suffering for the billions involved is also likely. Will we live to see a day where our current bout of wars in the Islamic world, and occasional spillover terrorism to the rest of the world, will seem like the "good old days"?
I doubt that a Chinese Great Depression will actually spur World War III. But, there are all sorts of reasons why an economically depressed China might turn to military force deployed in ways less disruptive to the economic order it depends upon as a means of mobilizing patriotic spirit, shutting down dissent, and advancing its economic interests. As explored below, there are a variety of ways that China could use an increased investment in military capabilities to advance its own national interests without taking any steps likely to incur the wrath of its advanced Western trading partners who are the only countries in the world that could be a military match for it.
In a demographically homogeneous country of more than a billion people, life is cheap. Abortion is more common in China than any other place in world. This appears to have played an important role in China's massive gender imbalances that could also fuel militarism. China also carries out more executions than any other country in the world (more than 85% of the world total, while making up less than 20% of the world's population), although this is falling with little publicized legal reforms that seem to be mostly driven by domestic forces rather than international pressure. China's share of executions outside Muslim countries and of executions for non-murder crimes is even greater. What happens if the view that life, especially the lives of young men which is has in great excess, is cheap, spills over into the military sphere?
And, of course, history has shown repeatedly, that one way to deal with a demand shortage in the civilian manufacturing sector is by injecting Keynesian stimulus into the economy by converting underutilized civilian industrial capacity to producing military equipment, just as the United States used World War II to help lift it out of the Great Depression.
Taiwan, perhaps impressed that China has not entirely strangled the good laying the golden egg in Hong Kong, and recognizing that Chinese communism is far less communist than it was in Mao's Day, is warming towards China. But, China's ardor could easily become stifling and scary if a burst economic bubble in China moves China back towards more orthodox Communism (with economic innovators run out of power in the face of charges of corruption and decadence, and the most vulnerable of them executed), and simultaneously causes China to take a more aggressive military stance towards its "wayward child" on the island of Formosa. Yet, both steps are possible, and indeed, likely ways that the old guard of plutocratic leaders who were successful for so long, until they weren't, could try to maintain public support in the face of the devastating collapse of a manufacturing bubble in China's economy.
Then again, true Communism has been a brief historical blip, shorter even than the "oil age". Even people terribly confused, angry and afraid as the largest country in the world experiences an economic collapse may not see a return to hard core Maoism as an attractive option; the bad taste may be sufficiently fresh to be avoided by the Chinese people in favor of something different.
Perhaps de facto monarchism (the path that North Korea, an economic failed state surrounded by prosperous neighbors has chosen) of some kind might emerge, for example. The exact formal political character of a "reformed" post-collapse regime may end up being more or less irrelevant.
A Plausible Scenario For Chinese Militarization And Power Projection
In a more plausible scenario, China might use increased militarization, by emulating Theodore Roosevelt in carrying a big stick, to support its diplomatic and economic objectives.
For example, China might use its limited aircraft carrier power that it is currently in the process of realizing, not to make war with the "great naval powers" but to discourage third world countries, for example in sub-Saharan Africa, from disregarding economic agreements with China, much as the U.S. did in its dealings with small countries that were economic partners in Latin America and the Caribbean from about 1890 to 1933, and sporadically since then. China has already embarked on a policy of making major investments in mining operations in sub-Saharan Africa and Afghanistan, and of using its navy as part of a coalition of anti-piracy forces in the open seas near Somalia.
If Taiwan is lucky, Chinese militarism will start not there, where China might trigger a total war with the United States, but with China's conquest of its troublesome and unstable North Korean neighbor which it could easily crush like a bug if it was so inclined. There are plenty of pretenses (e.g. unpaid debts owed to China; refugees who flee to China; a nuclear threat) for China to start a war with North Korea any time its leaders are predisposed to do so. This conflict might resemble the military campaigns of the Axis Powers before World War II proper began that established military superiority, protocols, nation building techniques, and helped to accustom the domestic and international public to a more aggressive approach to foreign policy.
Why North Korea?
Unlike Taiwan or South Korea, no international power would be likely to come forward to defend North Korea's sovereignty if China made war with North Korea, which has no fast friends in the international community other than China, while it has many sworn enemies. After all, the world community's response to Russia's annexation of Crimea and incursions into Eastern Ukraine have been half measures at best, and Ukraine was a NATO member with many political and economic allies in the West. If China were to conquer North Korea, much of the world would welcome the change and even the "liberated" North Koreans might appreciate the change once they learned just how bad they had had it under the regime that rules their nation today, even if it meant living under a superstrate of Chinese "carpet baggers" during the "reconstruction" phase of the operation (providing a means of exporting restless young men from China to form this new foreign ruling class in North Korea, in the process).
China might even "nip" the Western trade partners that feed it, although its leaders probably have the sense not to escalate the situation into an all out total war. Once it defeated North Korea, Chinese leaders might consider looking for a way to make the point that its submarines have the power to sink American surface combatants, if it could do so without providing a total war.
For example, a Chinese general with political backing in the regime might order a Chinese submarine to sink a U.S. warship or aircraft carrier, and then immediately disavow the attack as an act of insubordination or mistake, by apologizing, offering to pay a handsome restitution, and executing the scapegoat sailors on the sub for their "grave error" to appease the U.S. while at the same time demonstrating its military might against a first rank naval force. China has already recently made a similar point with one of its submarines without firing a shot.
Limited air strikes in third world countries to protect its economic interests, a Chinese conquest of North Korea, and token skirmishes with some first world country's naval forces, could be first steps for China in building up its military credibility in order to establish a tighter hold over regional communist or formerly communist countries aimed at developing a system of modern Chinese tributary states.
Countries like Laos, Vietnam, Cambodia, Burma and Mongolia might be the first dominoes to agree to economic arrangement with China that are decidedly one sided in the face of a veiled threat of military intervention.
For example, Laos might agree to put in place immigration laws that encourage its young women to emigrate to China to provide wives for Chinese men who can't find them. Laos might accept as immigrants from China malcontents and dissidents that China wants to exile but monitor. Laos might pay Chinese managers high percentage "consulting fees" for purporting to manage their nationalized industries and its major companies. Laos might accept large Chinese military bases on their soil to provide China with a military buffer against invasion. And Laos might agree to supply raw materials and foodstuffs to China at below market rates in quantities that leave their own populations with shortages of locally produced resources and foodstuffs. Laotian negotiators would assent to these unfavorable treaty and contract terms knowing that if they did not, that China might invade their country as it did North Korea, leaving them under the direct rule of a governor appointed by China to rule over them as a territory with no independent political institutions whatsoever.
A country more likely to receive international support, like Mongolia, might receive more favorable terms than a country less likely to receive international backing in the event of a Chinese incursion, like Burma. China could calibrate the extent to which its relationship with a tributary state amounts to exploitation, to that state's independent military strength and the strength of its foreign alliances.
An actual invasion of any one or more of those states might trigger foreign military intervention of the kind that pushed by an Iraqi invasion of Kuwait in the first Gulf War. But, it would be very hard to justify the use of military force in support of a would be tributary state, when the threat of military force from China, rather than its actual use, is what pressured a country into agreeing to an unfavorable treaty or economic contract with China or a Chinese company.
In the wake of this kind of pressure applied to other regional tributary states, Taiwan might too decide that discretion is the better part of valor and "voluntarily" follow Hong Kong in becoming an autonomous but subordinate province of China, rather than risking war with a country that has recently demonstrated its military prowess, ideally on terms more favorable than countries that didn't have the United States as their international patron while the negotiations were being conducted.
Once again, of course, if Taiwan's elected political leaders did sign a treaty reunifying Taiwan with China and subordinating itself to the Chinese central government, for all practical purposes, there is nothing that the United States which has devoted so much of its military spending over the last seventy years or so to protecting Taiwan's autonomy, but assent to the will of Taiwan's leaders, even if that assent was secured in part through China's military duress. U.S. military resources previously justified with the defense of Taiwan would have to find new justifications in the defense of countries like South Korea, Japan, and the Philippines.