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  • Writer's pictureRichard Murff

The China Sneeze

Hey Man, where's my house?

The old saw was that when the US sneezes the rest of the world catches cold. In this grim new century when China coughs the world catches covid. I don’t mean that literal bat-wing disaster that was 2020, I’m trying to lean into an economic metaphor here.

The real threat to China isn’t covid – although given the effectiveness of its vaccines, the disease will tear a whole in society when lock-downs ease. More destructive is what is waiting for China and the world with President Xi Jinping’s unprecedented third term. Elite Beijing politics has always been something of a black box to outsiders, but rumors escape. Many elites in the Chinese Communist Party (CCP) resent Xi for his ambition and enthusiastic pulling of family strings, but he will likely be confirmed at the 20th CCP conference later this month. Thin-skinned, prickly and dictatorial premiers rarely get less so with unchecked power.

Ironically, his obsession with stability – of society, the party and ultimately his own power – will reek chaos through all three at the precise time when a very deliberate threading of the economic and geopolitical needled is needed. A hard landing for China, while the global economy is slowing, could very well derail Western attempts to engineer a softer landing.

Since market reforms started in China shortly after the death of Mao in 1978 the economy on average grew 8.2% until the turn of the century when things really got going, hitting 14.25% in 2007. The economy even seemed to float above the financial meltdown of 2008, winning praise from Western bankers reeling from their own excesses. Which led both Beijing and the rest of the world into assuming that the last Marxist powerhouse knew something about economics. It didn’t. The economy had been liberalized, yes, and was reaping the vast rewards of an enormous, well-populated blank slate who’d spent generations in absolute poverty. Now that population had ambitions. The CCP was still in control, but being Marxists, they had no idea how a market economy actually works and corruption flourished.

For his part, Xi is a devoted Marxist, and he wants to take the economy back to its Maoist roots. To keep his thumb on both the free-wheeling capitalists and the vast expanse of losers in the equation, Xi looted the engine behind all of this growth. It is worth noting that economic growth has slowed every year of Xi’s premiership. Still, the real estate sector grew into the queen mother of all speculative real estate bubbles: Local governments (and their officials) made fortunes selling the “people’s” land to developers and speculators, who began to build apartments with debt from banks rich with household savings and bonds in a country with more ways to save than spend. Soon they were expanding quickly and, here’s where it gets sticky, building apartments ordered two years ago with money raised from this year’s buyers. Something that works fine as long as you can draw in new investors. You know, like a Ponzi scheme.

Under the guise of reigning in the speculators and income inequality, Xi broke the real estate Ponzi holds some 70% of household wealth and 20% of GDP. Now he’s left with few good choices domestically: pump up the bubble to safeguard savings (and speculators) – which will eventually blow – or let it pop now. Given the global economy, exports won’t be of much help.

In 2008, the US sneezed out a lung and took out most of the global economy with it. As the economy slows at the end of 2022, there is still hope of a soft landing – a recession that lingers, but isn’t too bad if you aren’t a quiet quitter about it. Other than energy exports, the rest of the Russian economy really wasn’t that integrated with the West. Other than a few middling vodkas, you don’t see many Russian goods on the shelf, and ordinary Russians don’t see Western goods. China is different. A hard landing there would make a soft landing in the US and the rest of the world harder to maneuver.

In a rational world, this would make China less of a threat, but human choices aren’t rational – certainly not the choices of one unquestioned dictator.


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