A Communist Party of China (CPC) conclave is currently underway in Beijing. Although the event is not open to the public, the primary focus is clear: addressing the significant challenges facing the Chinese economy. These challenges include a property sector meltdown, overbuilt capacity, ballooning debt, especially among local governments, and a decline in foreign investment as Western nations diversify their supply chains and consumer goods imports. Official data released by China indicates a slowdown, prompting the CPC to convene and strategize solutions.
China produces a third of the world’s manufactured goods, so further overbuilding is futile. The housing sector, once a symbol of progress, now epitomizes the problem, with 80 to 90% of new buildings unoccupied, creating ghost towns. Local governments, key players in the housing boom, have accumulated around $12 trillion in debt. Combined with the central government’s $3 trillion debt, this situation is unsustainable.
Official Chinese statistics indicate economic issues, yet their accuracy is rarely questioned. These statistics are designed to present China favorably to the world, and even institutions like the IMF and World Bank rely on them without thorough verification. Local data is aggregated and released centrally, leaving little room for independent validation.
One reliable metric is Chinese exports, which cannot be easily manipulated due to the precise tracking of goods loaded onto ships and planes. However, internal economic data lacks such reliability, leading to estimates that the official Chinese GDP may be inflated by 20 to 30%.
Overcapacity and Market Challenges
In the last two years, China has built significant capacity for Electric Vehicles (EVs), aiming to dominate global markets with highly subsidized prices and abundant Lithium resources. However, import duties imposed by the US and Europe have thwarted this plan, and concerns about the quality and reliability of Chinese EVs, often based on reverse-engineered technology, persist.This situation mirrors the housing sector's overcapacity and lack of market demand. Now, President Xi is pushing for dominance in Artificial Intelligence (AI), aiming to automate factories with robots and computers. However, this agenda is questionable, as high automation could eliminate jobs, contradicting the population's demand for employment. Consequently, this push for AI-driven automation may also struggle to succeed.
Where Does China Go from Here?
China's future under one-man rule, with Xi Jinping at the helm for life, is uncertain. While his word is law and has thus far maintained order, the long-term prospects are doubtful. China is embroiled in confrontations with nearly all its neighbors, and its aggressive military and naval expansions are proving costly. Projects like the Belt and Road Initiative, ongoing infrastructure overhauls resulting in underutilized roads and bridges, and highly expensive but underused bullet trains exemplify how surplus export cash is being spent.The risks are manifold. If exports decline as importers diversify their sources, and if the quality of supply chain products deteriorates, factory activity will drop. Additionally, any conflict over Taiwan could devastate China's coastal export infrastructure, further jeopardizing its economic ambitions. China's rapid push to rival the West may ultimately lead to its downfall if these challenges are not addressed.
One last point worth mentioning is that today's China was developed with American support as a counterbalance to the Soviet Union/Russia over the past 30 years. This effort has ultimately failed, as China has now aligned itself with Russia. This demonstrates that in the global arena, there are no permanent enemies or friends, a principle that also applies to international business deals.
