The Chinese communists are back in style, at least in the international financial centers.
Foreign investors, who once called China “uninvestable,” are now flocking to the country’s stock markets. According to the Institute of International Finance, foreign inflows into Chinese stocks in the January-October period were 443.9% higher than the same period last year.
However, observers aren’t sure this is a good idea. “Many investors have put their money on the narrative that ‘nothing will hinder China’s global dominance,’” writes Rana Foroohar of the Financial Times. Investors, she notes, believe Beijing has already won the trade war with President Donald Trump and is poised to dominate chips and AI. China, the thinking goes, will surely become the new global hegemon.
Even Foroohar, once a Chinese bull, does not now share this optimistic line. The fundamental nature of the regime, she argues, leaves China ill-prepared to lead the world.
Foroohar is right. When you look closer, the bullish narrative seems false.
For starters, China’s economy is flattening. Underlying indicators suggest that official gross domestic product figures are exaggerated.
Chinese President Xi Jinping is pushing an exhausted economic model to the breaking point. (Oliver Bunic/Bloomberg via Getty Images)
More fundamentally, Xi Jinping is pushing an exhausted economic model to the breaking point. For example, decades of absurd overinvestment in real estate have led to a bubble. According to He Keng, a former senior statistics official, China has enough vacant homes for the entire population of 1.4 billion. That extreme oversupply cannot be eliminated without a crash or, worse, a decade or more of Japanese-style stagnation.
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Xi also presided over massive infrastructure overbuilding, especially the high-speed rail network. China’s railway technology is magnificent, but the system is losing a ton of money, something that would be obvious if China State Railway Group Co. would properly take into account the cost of capital and debt service.
However, Xi is not changing course. At the Communist Party’s Fourth Plenum last month, he unveiled the 15th Five-Year Plan, covering the half-decade starting next year. The blueprint contemplates “high quality development” through advanced technology.
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As a result, China is developing the most efficient manufacturing in the world – the country’s ‘dark factories’ are so automated that no lights are on on the assembly line because no people are needed – and is flooding the world with its products.
“What makes China unique is not the technology, but the political environment that accelerates its implementation,” writes Desmond Shum, author of “Red Roulette,” about X. “In democracies, automation is slowed by elections, unions, NGOs and courts. China has none of these shock absorbers. If the state insists, the system will move.”
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The Chinese Communist Party has created a ‘technical state’. The leaders, says Dan Wang, author of “Breakneck: China’s Quest to Engineer the Future,” “are treating society like one big engineering project, in which people are just another building material that the leaders only want to modify and destroy as necessary.”
The Chinese ‘building material’ – the population – is now extremely unhappy. This decade, a gloom has descended on Chinese society, something that became evident during the strict COVID lockdowns and especially after the economy failed to bounce back from the pandemic.
Widespread pessimism has led people to ‘lay low’ or ‘retire’, different ways of withdrawing from society. And people postpone or refuse to have children. This trend, combined with other factors, will result in China losing three-quarters or more of its population this century.
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No wonder Chinese intellectuals and social media users are calling this moment their country’s “trash time in history.”
In the meantime, Xi Jinping has responded no differently to society’s unhappiness than by launching a censorship campaign against “excessively pessimistic sentiments.” Most importantly, he is unwilling to make structural changes to get more money into the hands of the state laobaixingthe common people.
Consumption now contributes about 38% to the country’s GDP, one of the lowest figures in the world. Given Xi’s pro-industrial policies, that percentage will fall even further.
Xi is confident in his grip, although few economists, analysts or observers think his export-dependent plans are sustainable. World markets are not large enough to absorb Chinese factory production.
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Talk about short-term thinking. “We have been evangelized for decades to think that China is a culture of strategy, that the country always takes the long, patient view,” Blaine Holt, a retired U.S. Air Force general and now China watcher, told me. “The Communist Party is hanging on by a thread today, wondering how it will get through the rest of November instead of the rest of this century. Long term now means months and not decades.”
Chinese President Xi Jinping speaks after participating in a group photo during the G-20 summit in Rio de Janeiro, November 18, 2024. (AP Photo/Eraldo Peres)
“It is a powerful production machine sitting on top of a fragile socio-economic structure,” Shum writes, referring to China. “A combustible combination – and not an environment that foreign capital is eager to endorse.”
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At the moment, foreign capital is eager, but China has punished investors before.
Foreigners will almost certainly lose money again, given the unstable nature of the economy and society.
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