The world gazes at the economic miracle of China. China has managed to single-handedly keep the economy of the entire world running for the past few decades. Without the ongoing efforts of China to grow and renew, the whole world would be in a poorer economic state. But this miracle is likely to come to a grinding halt in the years to come. And the longer it takes before that moment arrives, the deeper the fall will be. Is the world prepared for that kind of downfall?
For the past decades, China transformed itself from a disadvantaged farmer state into a modern world power. The average growth rate of China’s Gross National Product has been close to 9% for the past 30 years!
If the current growth rate continues, China will be the largest economy in the world in 2020. But is that really going to happen? I give you eight reasons why the Chinese economy will collapse before 2020.
1) The salary of many Chinese workers has tripled over the past 10 years. Thus Chinese products become more expensive. Therefore China will lose its status as a low-wage country and its position as the workshop of the world. The International markets will move to other places for cheap labor. Countries like India, Bangladesh, Pakistan, Vietnam and the Philippines will benefit from this. This will give the Chinese economy a major blow in the near future. Since the European wages are under pressure for many years now, even some (Eastern) European countries could become suppliers of labor that is cheaper than the Chinese workforce.
2) Chinese production has indeed always been cheap, but not always of high quality. Some relatively expensive countries remain competitive (Germany and Japan, for example) because of the very high quality of the products made in those countries. China will have to reform its labor culture to archieve the same quality levels that we are used to get from Germany and Japan. Such a reform will take a long time and will cost a lost of money.
3) A significant part of the economic growth in China over the past decades is related to the construction of homes, offices, shopping malls, roads, railway tracks, etcetera. However, the demand for new construction projects is drying up in many places in China. We all know what happened in Dubai! Nonetheless, the Chinese government is still in the process of building entire new cities for millions of people. Right now there are 65 million (!) new apartments unoccupied in China. This situation could end up to become the biggest real estate bubble in history. If that bubble bursts, it will have a devastating effect on the Chinese economy.
4) The building boom, as mentioned in the previous paragraph, is largely financed by debt. The public and privat debt of China have exploded for the past 10 years. Therefore China faces a considerable risk of a very serious credit crisis.
5) China doesn’t have a real free market economy as is the case in for example North-America, most parts of Europe, Australia and Japan. Big economic developments in China are still controlled by the central government. History has shown that large-scale centrally planned economies eventually get stuck in bureaucracy and demotivation (see Cuba, North-Korea and the former Soviet Union).
6) The Chinese government has to wage a permanent political and (para) military struggle to keep the country together. Separatist movements are mainly seen in peripheral regions, far away from the most populated urban areas. But in 2014, protests for more political freedom have risen in Hong Kong, one of the most important economic engines of the country. The police are involved in beating these protests down. Keeping a country together by force comes with a high cost that could eventually hurt the Chinese economy seriously. But allowing China to split up in several independant nations could end China’s position as one of the world’s leading powers. It’s a tough choice…
7) China has been able to maintain its growth recently through cheap energy. In 2014, oil prices have plummeted 50%. However, energy prices will not remain as low as they are today. Once the oil prices will rise again, China will have to face significant expenses.
8) In the years to come, China will experience a growing competition from neighboring India. India harbors potentially an even larger economic miracle than China. Within 10 years, the Indian population is likely to be bigger than the Chinese. The growth numbers of the Indian economy match the Chinese growth. India has a highly developed technology and a growing part of the population is well educated and speaks English. So that means China will soon have an equivalent competitor right at its doorstep. And that could hurt the Chinese economy severely.
The development that the Chinese economy is going through right now, is partly similar to what Germany and Japan experienced during the first decades after World War II. Those stormy developments in Germany and Japan came to an end after 20 years of spectacular growth. But there are big differences. The population of China is 6 times bigger than the combined populations of Japan and Germany. So everything in China occurs on a much bigger scale. A collapse of the Chinese economy will have consequences on a scale that has never been seen before on the face of this planet. These consequences will not only affect China and its neighbors, but the whole world. Growth like this can not endure forever. The question is not if the Chinese bubble wil burst, but when the Chinese bubble will burst. And when that happens, do we know how to deal with the consequences?