Is America prepared to deal with a China that may decide to divert attention from its failings at home by creating a regional crisis? (Photographer: Tomohiro Ohsumi/Bloomberg)
During the financial crisis of 2008, China lauded itself for escaping contagion by the American financial meltdown. Now, however, China’s recent stock market collapse is infecting global equity markets, ushering in a period of almost unprecedented volatility. But while the world focuses on the effects on Wall Street, the real story of the summer of 2015 is that China’s troubles are just beginning. The spillover effects likely will spread beyond China’s economy, even affecting politics and security—that should be the main topic of conversation when Chinese president Xi Jinping visits President Obama in Washington this month.
It is easy for a political contender such as Donald Trump to score points by claiming that Beijing is “ripping us” by stealing U.S. jobs and cheating through currency manipulation, and that “China would be in trouble” were he elected. But as in so much else, The Donald misses a much bigger story: We have hit “peak China.”
The coming years promise far greater troubles for the world’s second-largest economy
China is unlikely to completely collapse. Yet the Chinese success story of the past quarter-century is over, just like the Japanese miracle ended abruptly in the 1990s. Due simply to its size, China will remain one of the world’s largest economies for decades to come, and it will still be an indispensable part of the global supply chain and trading network. But from political, diplomatic and economic perspectives, China faces risks that will test the skills of President Xi Jinping and his co-leaders, possibly threatening their political authority.
It is easy to focus on the precipitous drop in China’s stock markets since early summer, including that 11% drop in the Shanghai Composite index, leading to the Dow’s recent plunge. But even with the stock markets barely recovering, the bigger story is the dramatic slowdown in the Chinese overall economy—from factory activity to export and import orders. Economic growth supposedly rang in at 7% last year, but few experts believe the official numbers are accurate. Western business, such as automakers, are scaling back their production and sales in China. In response, Beijing has both reduced interest rates and pumped money into the economy, yet both tactics have failed to stem the financial drop or ignite growth. The world needs to prepare for a China that grows far more slowly, thereby affecting everything from consumer goods to investment.
A slowing economy is dangerous for the Communist Party
But in China, everything is political. A slowing economy is dangerous for the Communist Party, which is already in the midst of a steady and growing domestic crackdown on dissent, liberal forces, non-governmental organizations and lawyers. Xi’s anti-corruption campaign is widely seen as a tool to eliminate potential Party rivals, thus heightening tensions inside ruling circles. Public dissatisfaction with the government spiked again in August after the massive chemical explosion in Tianjian. China’s repressive leadership stays in power in part because of its image as a competent technocracy. Should it lose legitimacy due to economic decline, China’s always-present domestic unrest could boil over, leading to even greater domestic repression, and an ever worsening security crisis at home.