The Coming Collapse of China?

Is it vogue to be pessimistic about China’s economy? Andy Rothman explores.

Key Takeaways

  • The consensus view of the Chinese economy may be too negative, underestimating the resilience of Chinese consumers and entrepreneurs, and the pragmatism of policymakers.
  • As memories of COVID fade, consumers should regain more confidence, supported by high savings and strong income growth.
  • The government is voicing enthusiastic support for the private sector, including platform companies, in an effort to restore entrepreneurs’ animal spirits. A gradual, consumer-led economic recovery is likely in the coming quarters.
  • The Biden administration’s recalibration of its China policy won’t make the relationship much better in the near term, but should stabilize it, reducing the risk that an accident spirals into a crisis that neither side desires.

It’s in vogue to be pessimistic about China’s economy, but is the consensus view too negative?

Recent data signals that a gradual, consumer-led recovery is underway, and the two main, short-term obstacles to a return to pre-pandemic growth levels are likely to recede in the coming quarters. First, most of the developed world moved on from COVID two years ago, while the last wave of COVID cases and deaths in China only ended in January, restraining household sentiment and spending. With each passing month, Chinese consumers should regain more confidence, supported by high savings and strong income growth. Second, in July, the government took the pragmatic step of voicing enthusiastic support for the private sector, including platform companies, in an effort to restore entrepreneurs’ animal spirits, which have been weak for two years.

The resilience of Chinese consumers and entrepreneurs, as well as the pragmatism of the country’s policymakers, have often been underestimated, and that is likely the case again today.

In his 2001 book, The Coming Collapse of China, author Gordon G. Chang forecast that China’s “economy, and the government, will collapse. We are not far from that time.” Similarly dire predictions for China’s economy were common during the Global Financial Crisis, the Trump trade war, and the COVID lockdowns.

Instead, between 2001 and 2022, inflation-adjusted (real) per capita income rose 4.6 times in China, compared to 33% in the U.S. and 22% in the UK. The Chinese economy has been stressed, but has, over the last decade, accounted for about one-third of global growth, larger than the combined share from the U.S., Europe and Japan. All of that, of course, is ancient history for investors, who are asking, what is the Chinese economy doing for me today?

Before answering that question, I’d like to remind readers why I generally have a glass-half-full perspective on the Chinese economy.