China is the original riddle wrapped in a mystery inside an enigma. A country striving for modernity but feudal in its treatment of its citizens, Beijing’s economic identity is a combination of Communist orthodoxy and crony capitalism. As you might expect, the two don’t work well together.
On the outside of the riddle, China is booming, the people are subservient and happy, and the government is looking to the future with confidence. This is the picture the Chinese Communists paint for the world to see. The reality is much different.
China is being crushed by debt, has become dependent on high levels of debt, and has created a bubble in several sectors, like housing and household goods.
One noted Chinese economist said in 2019, “Basically, China’s economy is all built on speculation and everything is over-leveraged.” He was proved right when the massive overbuilding of housing caused the market to collapse in 2021.
“As a result, tens of millions of apartments have no residents, millions have been sold but not finished, and those that are inhabited are declining in value,” writes Wessie du Toit in Persuasion.
Consumer spending in China is its Achilles’ heel. China makes more than enough goods to dominate world markets, but the 1.2 billion Chinese are lagging in how they spend their money.
The country is so dominant when it comes to making and building things because the state has structured the economy to prioritize massive investments in housing, infrastructure, and manufacturing. Many Chinese firms are effectively subsidized to one degree or another, and frequently produce more than China or the world wants to buy. The nation’s warehouses bulge with unsold stock, its urban lots with abandoned cars and share bikes, all casualties of ill-conceived government schemes. The problem, aside from waste, is that these investments have long yielded diminishing returns in terms of sustainable economic growth. China has therefore become dependent on growing levels of debt.
“Rather than pumping cash into more railways, cars, and factory machinery, the government should try to raise the spending power of Chinese consumers, creating domestic demand for goods and services,” writes du Toit, quoting Chinese economists. However, the Chinese economy can’t manage a drastic change that would dramatically shift spending priorities toward consumers.
Debt is the silent killer, and the Chinese are careening toward a massive debt bomb. Du Toit reports that “government sector debt, including local government financing vehicles and associated funds, stood at 124% of GDP in 2024, while China’s total debt was measured at 312% of GDP.”
By contrast, U.S. debt is at 125% of GDP. It, too, is climbing precipitously and could rival China if we don’t get a handle on government spending.
It’s not just the debt that’s pulling China down.
Ordinary Chinese have paid a steep price for the state’s focus on infrastructure and industry. Household income has lagged behind economic growth, and, despite having a communist government, China’s welfare services remain meagre. Social spending is kept down in part by the hukou system of residency permits, which denies China’s vast army of rural migrant workers access to healthcare and unemployment insurance, pension benefits, or schooling in the cities where they toil. Putting aside basic questions of justice, households in such circumstances do not provide a lot of demand for goods and services, since they have to save to insure against hardship and debt.
Nearly 70% of the Chinese people still live in rural areas. While the conditions of the Chinese peasants have improved remarkably in the last 50 years, they are held back by a system that outsources labor-intensive manufactured goods like clothing and electronics to other parts of Asia, leaving people in the hinterlands. It’s how Chinese companies maintain market share while keeping costs at rock bottom.
How is China able to hide its economic deformities so effectively? Part of its success is encouraging Western myopia.
If such flaws in the Chinese model are underappreciated in the West, it is partly because the authorities hide them from view. The China Daily does not devote a lot of space to the country’s failings, with the exception of President Xi’s never-ending anti-corruption drive within the Party (an initiative that has naturally been more successful at removing potential opposition than actual corruption, which remains endemic). There is a certain shimmering quality to a great deal of what the outside world sees of China. International agencies such as the Program for International Student Assessment (PISA) give glowing assessments based on the Potemkin projects they are shown. Before he became paramount leader, Xi’s major gig was the 2008 Beijing Olympics, a spectacle so successful at laundering China’s reputation that, when I visited the capital more than fifteen years later, it was still being celebrated in museum exhibits.
“China is a tanker that looks impressively shipshape from a distance, with the captain and his lieutenants standing proudly on the bridge, while below deck sailors are desperately pumping water and plugging holes to keep the vessel afloat,” to quote a metaphor used by the historian Frank Dikötter.
Does this weakness make China more dangerous as its economy slides into crisis? China wouldn’t be the first nation to go to war to distract from economic problems and domestic unrest. It already has a ready-made adversary in its “Lost Province” of Taiwan. It’s not like it hasn’t warned the world about getting Taiwan to submit.
One way or another, China will have to face its economic demons.
