I recently spent about a month traveling in China, specifically the Yunan province, Xi’an, Guangzhou, Beijing, Shanghai, and Hangzhou. China is phenomenally interesting, but not at all what I expected, in part because I had absorbed the apparent consensus among pessimists that the 21st century would be the century of China's rise and the U.S. decline. All I can say is, no way. China is in serious trouble. Here are some problems I observed:
1: Gigantic Real Estate Bubble. Half of China appears to be under construction. High rises dot all major cities — most nicer than any place I’ve ever lived in as an adult — and more seem to be going up every day. In Beijing and Shanghai, perhaps this construction makes sense; they are global cities that will probably attract top talent for years to come. But Xi’an? Kunming? It appears that China’s real estate developers have started construction with grossly inaccurate forecasts of future demand for housing. This explains why there are currently 64 million unoccupied homes in China. When the bubble pops, the fall will be very big.
2: Investment Without Demand. In Xi’an, after visiting the Terracotta Warriors (which are sweet), my mom and I stepped inside a mall looking for a restaurant with an English menu (a rare thing in a city of 8 million). What we found there was a six-story mall of entirely high society goods — grand pianos, living room sets, ostentatious refrigerators — without a single customer. Hundreds of salespeople stood around idly and watched us navigate the whole thing (obviously once we were inside we had to check all six storys for customers). The phenomenon of empty malls should be familiar to anyone who has ever lived in a major Chinese city, but who is investing in this nonsense? Who wouldn’t be wary in the wake of the New South China Mall, the world’s largest mall that is currently 99% vacant? Come on China, invest in something people need, not more empty Gucci stores!
3: Looming Population Catastrophe. Anecdotally, I would not peg the number of beggars in China as higher per capita than D.C., New York, Cairo or Bangkok. But they were notably older. My best guess is that they were retired people who lost their children and had no means of acquiring income. Heaven only knows how much worse this will be once the population levels out, (which will apparently be in 2030,) and the youth/elderly ratio will be a completely unprecedented phenomenon in human history. Is China going to devote a substantial portion of its resources to the aging population? Or, is it going to expect working age people to take care of their parents? Either scenario will further depress consumption, exacerbating the investment/consumption imbalance.
4: Infrastructure? Thomas Friedman is fond of saying that going from Hong Kong to New York is like “going from the Jetsons to the Flinstones.” The implication is that America is falling behind some mythical Asian behemoth that will out-invest and out-compete us. Someone obviously never went to Xi’an, a city of 8 million with no working subway; and someone didn’t investigate the safety issues of the High Speed Rail (which, admittedly, is much better and cheaper than Amtrak; Amtrak sucks). The infrastructure investment in China is really uneven. Beijing and Shanghai are doing great, but many other places go neglected.
I’m not going to get into the education system, human rights abuses, or public health catastrophes looming, because I don’t know much about them, but my instinct is that things are worse than we know.
It’s not that controversial to say that China is going to face some serious, structural issues over the next few years. But, optimists can respond, the China Communist Party has nearly infinite possibilities for policy response to any economic crises, as opposed to America, which is somewhat tied up by a status-quo oriented political system and partisan friction. And yes, if the CCP suddenly proves extremely competent at fixing problems, then China will be set. But who really trusts them? Should we ask Wang Lijun about the CCP’s competence and transparency?
It’s just a hunch, but I think China is in a much worse state than even we know; I wouldn’t be surprised if decades of economic data turns out to have been doctored. And when China stumbles, I just hope they don’t decide to close off all borders, and trade in a repeat of Smoot-Hawley. Honestly, lord help us if that happens.