Yesterday’s IMF report on China “praised China’s leaders” for responding quickly to its recent economic slowdown and concluded that “China’s economy seems to be undergoing a soft landing, though global headwinds are increasing.” It also repeated increasingly frequent warnings about the fragility of the banking sector and suggested that there are “significant downsize risks” ahead in China.
China may have a soft landing amid the current slowdown, but it is worth reminding ourselves that it is a country with enormous contradictions — many of which look to be far more complicated than the challenges faced by the United States. (I’ll leave it to better-trained comparativists to produce more rigorous empirical evaluation of this proposition). Market reforms fueled much of China’s growth in the past two decades, but its state capitalism model still favors state owned enterprises and market reforms in the banking system have lagged. Almost all of the 4 trillion RMB stimulus in 2009 (the equivalent of roughly $650bn or somewhere between 4 and 6 times the amount of the US stimulus) and the most recent stimulus was spent on capital spending in infrastructure. And, while this stimulus approach enabled China to weather the recent slowdown this spring and the 2009 storm and maintain an 8% growth rate (the bullet trains are really cool), those policies have also exacerbated a number of challenges.
First, the stimulus was not done through traditional mechanisms of fiscal policy, but through a dramatic credit expansion — much of which happened off of bank balance sheets making it almost impossible to assess the extent of debt (and exposure to potential asset bubbles). As Kai-yuan Tsui from Chinese University in Hong Kong warned in a paper last fall, the credit-based stimulus created powerful incentives for both banks and local government officials to assume extensive levels of debt and to push forward on risky infrastruture projects. I think its fair to say that we have no idea what kind of debt levels have been incurred here or how vulnerable the Chinese financial system is at this point, but I’ve heard both Bank and IMF officials express serious concerns about how totally in the dark they feel about the current situation.
Second, as the IMF report warned, China is increasingly finding itself in an infrastructure trap and has far greater infrastructural capacity than demand — a situation that is simply unsustainable and “uneconomic.” (Sure it has lots of high speed rail capacity, but only a fraction of rail riders can afford the tickets; it has airports that no one can use — and it has a beautiful Olympic stadium, but it’s simply too big for most athletic events even in China). But, even more problematic is that the political leadership has not yet demonstrated an ability to shift to alternative stimulus options such as subsidies for consumption or new fiscal policies on social safety nets and such.
Furthermore, a friend who teaches at Fudan University told me that in the rush to keep growth and employment high, local building codes, environmental regulations, labor laws, and a host of other emerging regulatory policies were summarily discarded. This has resulted not only in shoddy construction, but also further empowered some of the most corrupt local officials around the country and has increasingly frustrated local populations who resent the corruption and dramatic rise in income inequality. All of this poses a major challenge to the leadership’s social harmony policies.
It seems to me that IR scholarship needs to consider the implications of this messier economic, political, and social situation within “China’s rise” and the implications this will have for global politics. To be sure, China is a country that will continue to command a major global economic presence and consume a ton of global resources. It will continue to expand its international economic and diplomatic presence. But its economic growth will slow (and may even face a sharp decline if a banking/local debt crisis spikes) all the while its demographic (aging), environmental, and political challenges increase. Ruchir Sharma’s conclusion is that China will face a “natural slowdown” and that the global balance of power will shift from one of “finance to politics.”
I tend to agree. This hegemonic transition looks to be one in which both the hegemon and the most-likely hegemonic rival stumble at some point before the finish line.