Here’s a Question: Is China Headed for an Economic Crisis?

Short answer: no. But the long-term trends of a “peaking China” will have a profound impact on America’s future and U.S. manufacturing, according to experts at the Hudson Institute.  

There’s been growing chatter among policy types the past several weeks about China’s slowing economy, including what it may mean for global manufacturing. Factories there are in a bit of a slump — and China is dealing with a whole host of other economic issues right now.

But does all of this signal that China is on the verge of an economic crisis — or is all of this being a bit overblown?

That is the question that the Hudson Institute sought to answer on Monday during a virtual event featuring Dr. Thomas Duesterberg, a former chief of staff to then-Sen. Dan Quayle (R-Ind.) and author of the recent report, Economic Cracks in the Great Wall of China: Is China’s Current Economic Model Sustainable?

Duesterberg, now a senior fellow at the Hudson Institute, said his report challenges a common assumption that growth in the PRC [People’s Republic of China] will continue.” Citing “looming crises” growing from “structural problems,” Duesterberg said he does not foresee a financial failure like the 2008 economic crisis in the United States. Instead, Duesterberg — along with fellow speaker Leland Miller, the CEO of the China Beige Book — mused on how a slow-growing China might change its relationship with the world, now and in the future.  

China is facing a series of stressors, Duesterberg said. First is demographics. The Chinese population is set to fall more than 15% over the next 15 years, and the population that remains will be much older. By 2050, about half a billion people will be over the age of 60.

Meanwhile, the social welfare system in China is undeveloped and underfunded compared to other advanced economies, Duesterberg said.

“Third, there is an unequal distribution of income, vertically and geographically… from being one of the most equitable economies in 1990, China has inequality higher than in most regions,” he added. “Inequality extends to the education system, to job opportunities and opportunities for women.”

And these problems are compounded by state sponsored inefficiency, and a lack of self-sufficiency. “China is increasingly looking abroad to finance its debt just as Western economies are waking up to China’s actions,” Duesterberg said. 

In summary, “it would be very difficult for any world leader, faced with that conglomeration of problems, to be able to manage that.”  

Hudson Institute Senior Fellow Nadia Schadlow moderated the discussion, and asked Miller if he wished to refute Duesterberg’s claims; they agreed on the big picture. When it comes to economic shocks, “the chances of an acute crisis hitting are actually very low,” Miller said.

And both experts derided China’s theft of intellectual property, pointing out that the Chinese Communist Party (CCP) can put a “firm finger” on the scale for Chinese firms and create unfair competition.  

The two also spoke on how China’s global initiatives, such as the infamous Belt and Road Initiative, have led to widespread speculation about overarching Chinese ambitions. In many discussions, China is presented as a power executing century-long plans to overtake American industry. Miller opined that China might not be so cautious in their approach.

“A lot of their policies antagonize their biggest trading partners,” Miller said, adding later that “if Western economies push back, then this ability to export their excess product and financial help, I think is diminished. This flows into some skepticism on my part about whether or not in the medium term they’re going to be able to handle all these issues.” 

But in U.S. efforts to match and mitigate Chinese malpractice and manipulation, the U.S. should be careful not to adopt an automatic anti-China reflex, Miller warned.

“The challenge for policymakers is much more significant because when we’re talking about a rising China… I think there is something more dangerous than a rising China, and that is a China that is realizing it is coming close to peaking,” Miller said. “Because a China that is coming close to peaking is going to look at itself, look at its goals, and say, ‘We have a narrowing window here.’… Does that speed up China’s aggressiveness?”

When pressed on policy recommendations, Duesterberg echoed a refrain that might sound familiar to readers of this blog.

“Protecting national security and challenging China’s misuse or disregard for its obligations that it’s entered into, for instance in the World Trade Organization… it’s pretty clear we can fight back against that,” Duesterberg said. “What I’m a little bit more ambiguous about is going forward as China makes this, tries to achieve the goal of self-sufficiency… they want to retain access to Western markets… but can our policies induce them, incent them to back off from that drift away or sprint away in some cases from the standards of the World Trade Organization, the Bretton Woods institutions that we had thought they might embrace?” Miller came to a similar conclusion, offering two futures to policymakers.  

“In a one-on-one, even playing field, the U.S. model, this innovation economy, will beat this non-market authoritarian model 90% of the time. But the problem is, when you have a system like China’s, you have the ability for the state to put a firm finger on the scales in very specific ways. And what we have seen, what used to be called Made in China 2025… was this extraordinary drive for all the things that ae going to make up this next industrial revolution: we are talking about artificial intelligence, 5g, robotics, quantum, biotech all these very important top, elite tier advanced manufacturing issues. And the problem with the U.S.. competing on an even playing field with China, is that, of course, it’s not an even playing field,” Miller said.

“So, the focus of U.S. policy should be to make sure these backdoor subsidies are being combatted… this is the type of thing that U.S. policy will need to step up on in order to compete, compete, compete, and push back on the Chinese finger on the scale… at the end of the day, if we are allowing China to get certain access to advanced technologies, and then they use those to beat us, who is at fault here?” 

To read Duestenberg’s report, click here.  To view the webinar in its entirety, click here.