Four reasons why China threatens to collapse

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Personality of the week: Xi Jinping
Four reasons why China threatens to collapse

By Wolfram Weimer

Declining exports, a real estate crisis and weak consumption slowed growth in China. Youth unemployment has risen to record levels. The central bank is trying to counter this. But China’s problems are more explosive than officially recognized – and of a strategic nature.

The Chinese economy is faltering. For years, Beijing has been beaming with self-confidence and confidence in the future with its economic miracle figures. Now all around it seems the reverse gear has been put in place: exports fell 7.5 percent year-on-year in May, and imports contracted 4.5 percent. Manufacturing, real estate sales, retail sales, the job market – everything is weakening. In May, urban youth unemployment reached a record high of 20.8 percent. The PMI fell to a five-month low in May, clearly indicating a downturn. Auto sales only added 10.6 million vehicles in the first five months, the annual sales figures of 27 million (the average of the past seven years) were not reached again, and a brutal discount battle gripped the Chinese auto business. In order to support the economy, the Chinese central bank is now cutting interest rates and injecting 237 billion yuan (30.6 billion euros) into the economy. But the new money will not alleviate the problems.

The Institute for World Economics warns that “low real estate prices and the financial problems of many real estate developers have not only dampened construction activity, but have also had a negative impact on consumer spending.” Analysts point out that China is not only in short-term difficulties. There are also four problems that weaken China strategically and could mean that China’s long-term rise is over and the country is past its peak.

A shrinking nation

Firstly China is experiencing a demographic crisis. Chinese society is aging and shrinking rapidly. For the first time in over sixty years, more people have died in China than were born in 2022. Only 9.6 million Chinese people saw the light in 2023, and in 2022 there will be a million more. With 10.41 million deaths, China has officially shrunk by 800,000 people. The process will accelerate from now on – this is a long-term consequence of the one-child policy. On the one hand, India has overtaken China as the world’s most populous country. On the other hand, demographers have determined that China will decrease by 10,000 people every day in the coming years. By 2050, according to UN projections, the population is likely to decrease by 109 million.

Since China does not allow any significant immigration, the shrinking and aging population is threatened by great social upheaval. From the health system to the retirement system, conflicts are growing. At the same time, the workforce and consumer market will shrink. And so the pattern for China’s complete rise is essentially reversed. The National Health Commission predicts that the number of retirees will rise from 280 million to more than 400 million by 2035. Financing this poses serious problems for the Chinese leadership.

The only giant

secondly China is in an isolation crisis. China has very few real allies. Unlike the West, which has created a global federation of countries with the same value orientation, China is culturally and politically alone on the world stage. Even worse, almost all immediate neighbors at a critical distance are competitors or openly hostile to China. Language, writing, mores, and identity can hardly be exported either. This puts the growing power of China into an isolation trap.

China is trying to compensate for its isolation complex with renewed military aggression. The oppressive annexation of Hong Kong and the military pressure on Taiwan are attested to. Conflicts with the Philippines, Japan and Vietnam in the South China Sea as well. There are even regular shootouts with India. Similar to Russia, a destructive foreign policy energy drain is brewing. The danger that China will soon start a war is very real now.

This, in turn, means that the developing parts of the world economy are now choosing to “decouple” and make themselves more independent – albeit out of economic rationality – from a China that is becoming more insecure and aggressive. Western companies are trying to move their operations to other countries, either by moving to the United States or by “friending” countries that are more democratic and human rights friendly. This makes other locations in Asia more attractive. The effect is already noticeable: Analysts predict higher GDP growth in Vietnam or India in 2023 than in the middle country. Last year, China accounted for just 50.7 percent of US imports from Asia. In 2013 it was still more than 70 percent.

real estate bubble

third China is slipping into a business model crisis. A domestic real estate boom and strong overseas exports of manufactured goods have fueled China’s boom for four decades. Both are over now. The real estate bubble has burst, and China has an unsold inventory of more than 50 million apartments. Even large real estate groups are facing financial difficulties. Everywhere there are debt imbalances in the real estate sector, which accounts for 30 percent of the overall economy. Struggling giant Evergrande was just the beginning. About 30 other real estate companies have defaulted on payments to investors or have begun restructuring. China’s best-selling real estate group, Country Garden, reported that real estate markets “quickly descended into a severe recession.” Construction companies in China rely heavily on selling properties long before they are built to ensure liquidity. But sales have now plummeted, setting off a chain reaction of financial problems. Land sales fell 22 percent in the first quarter of 2023. Due to stagnant demand, sellers in some Chinese cities are now offering apartments with welcome money to attract buyers in the first place.

The collapse of real estate also has a political impact. For years, local governments in China mainly financed themselves by selling land to real estate companies. They, too, are facing financial hardship – like millions of individuals. Because more than 70 percent of Chinese wealth is tied up in real estate.

And the second pillar of the business model is also shaking. Exports are weakening because China is no longer a site of cheap production, global competition is compressing, and the West is asserting its own interests more sharply in trade relations. US restrictions on chip exports to China are preventing investment. China is in danger of losing the technological cold war between China and the United States, mainly because more and more trading partners are becoming more and more important. For now, it appears that India in particular could benefit from China’s newfound weakness. In general, China found itself in a position where it was more dependent on Europe and the United States than vice versa. Last year, China exported 6.4 million 40-foot containers to Europe, while Europe only shipped 1.6 million containers to China. In terms of value, EU exports to China last year were only 23 percent higher than EU exports to Switzerland. Therefore, China should seek compromises with the West. The semiconductor war with the United States is evidence of the balance of power in favor of the West.

Power struggle at the top

Fourth The crisis of the political system reaches its climax. The strict Corona policy, arbitrary closures and its chaotic end in December 2022 shook confidence in the political leadership. There is an open struggle for power between the new business elite and the party leadership, as the Communist Party’s political decision-makers increasingly rely on repression. This, in turn, hurts the economy. In a remarkable doctrine, President Xi Jinping recently called for doing business according to “Marxist” values ​​in the future. All alarm bells are ringing, and not just among global investors. It is also an indication that the regime fears losing power.

Beijing diplomats are increasingly talking about internal tensions among the elite. President of the European Chamber of Commerce in Beijing, Jörg Wuttke, cautions In Schweizer “Techmarket”: “Not only is China feeling headwinds in the real estate market and with the problem of heavily indebted local governments, but also as a result of the technology war with the USA, which is greatly weakening the ability to innovate. The loss of confidence among private entrepreneurs is something Also dangerous. There are still individual areas where private entrepreneurs can shine, for example electric cars or renewable energies. But there is great uncertainty in the technology sector. Important people are demoralized and demoralized. They leave. It’s as if Bill Gates turns his back on the USA The scare campaign against bankers, accused of being hedonists, isn’t helping either. Influential investment banker Bao Fan has recently been arrested. Businessmen.” Wootke sums up the situation this way: “China is getting more control-crazed and more communist.” However, this is a sure sign of an impending economic crisis.

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