The Coming Collapse of China

Why China's Premature Bid for Hegemony Is More Fragile Than You Imagine

Everyone is starting to resist now.
by Richard Javad Heydarian

China's futile resistance

“Never trust China,” a wrathful Hong Kong protester told this author during the large-scale protests on July 14 in the Sha Tin district earlier this month.

“We are never going to give up, people are fighting to their last breath.”
What began as a focused opposition to a controversial extradition bill, which would allow Beijing to retrieve fugitives and unwanted citizens fleeing to Hong Kong, has now morphed into a generalized call for independence altogether.
Carrie Lam, the much-derided pro-Beijing Hong Kong chief executive, has offered to resign but even if she does, that won’t be enough. 

Nor would an apology and accountability for brutal police tactics against unarmed protesters. 

As protests turn increasingly violent and radicalized, there are even fears of Chinese military intervention, which could lead to a Hong Kong version of the Tiananmen massacre.

The protests in Hong Kong, however, are part of a bigger region-wide backlash against China’s premature bid for hegemony. 

From Taiwan and the Philippines to Vietnam, Malaysia and Indonesia, a whole host of regional states are standing up against Beijing’s neo-imperial ambitions and revisionist policies. 

China’s time-tested strategy of ensuring the acquiescence of neighboring regimes through the co-optation of their corrupt elite is looking increasingly fragile. 

Moreover, Hong Kong is exhibit A of the perils of unbridled economic engagement with Beijing.

The Frontline Battle
What hundreds of thousands of Hong Kong residents are worried about is the preservation of the city-state’s unique political system. 

For them, Beijing has flagrantly violated the fundamental principles undergirding the so-called “One Country, Two Systems” regime, which was supposed to have governed Beijing-Hong Kong relations for five decades following the former British colony’s handover in 1997.
Under Xi Jinping’s rule, Hong Kong residents have seen the gradual emaciation of the promise of universal suffrage as well as the long-cherished freedoms of assembly and free press, and other civil liberties and political rights. 

China’s strongman leadership is obsessed with the “one country” at the expense of the “two systems” aspect of the bargain.
Critics argue, this has come about not only through the establishment of a de facto puppet regime in Hong Kong, but also the co-optation of the business elite, media, academy and the key institutions collectively governing the city-state. 

Beijing’s creeping intrusion is now literally concretely on display, thanks to massive state-of-the-art infrastructure projects, including the Guangzhou–Shenzhen–Hong Kong Express Rail Link (XRL) as well as the Hong Kong–Zhuhai–Macau Bridge, which potently symbolize Beijing’s long reach.
Even worse, there are even fears of Beijing’s surreptitious introduction of the infamous “social credit” surveillance regime to Hong Kong. 

That system would bring dire consequences for the basic freedoms of each and every resident, including foreign journalists, academics and businessmen based in the city-state. 

Furthermore, there are even fears of Chinese military intervention. 

Ominously, China’s defense ministry spokesman Wu Qian has made it clear that it can deploy the People’s Liberation Army (PLA) for quelling protests in Hong Kong if necessary.
“We are closely following the developments in Hong Kong, especially the violent attack against the central government liaison office by radicals on July 21,” Wu said during his briefing on China’s newly released White Paper in late-July. 

Wu suggested that the PLA garrison stationed in Hong Kong is on standby mode for any potential intervention. 

“Some behavior of the radical protesters is challenging the authority of the central government and the bottom line of one country, two systems. This is intolerable.”
What’s increasingly clear with the protests is the fragility of China’s time-tested strategy of purchasing the silence and loyalty of neighboring polities through economic penetration.
“The only thing I know is that no matter how much money I earn [because of Chinese investments],” a young teenage protestor told this author on July 14, “freedom is something I can [never] earn from China.”
For many Hong Kong youngsters, the benefits of closer economic ties with China are either too concentrated among the networked elite, namely the tycoons running the city, or else any benefits are offset by how they fully undermine Hong Kongers’ basic freedoms. 

In either case, Hong Kong’s youth show little support for closer economic engagement with Mainland China, which seeks to turn Hong Kong into just another major Chinese city. 

Beijing wants to this as part of a strategy of integrating Guangdong and neighboring economic dynamos into a Greater Bay Area masterplan.

The Regional Backlash
When asked about their advice to the region, a protester related: “Regional states should not only focus on economic growth… since China is just using economic ways to influence [other countries’].”
“Regional states should focus on their freedoms and own citizens,” she added with fervent conviction, pointing at Hong Kong as an example of what happens when you over-engage with China.
The Hong Kong protests are strengthening the hands of Beijing-skeptics across the region.
This is most especially the case in Taiwan, where the incumbent President Tsai Ing-Wen is facing a concerted challenge from pro-Beijing rivals ahead of next year’s elections. 

Inspired by the Hong Kong protests, Taiwanese officials have repeatedly emphasized the risks of economic entanglement with China.
“We now have more liberty to speak for our independence,” President Tsai told this author during an interview in June. 

Tsai discussed Taiwan’s economic decoupling from China, and the relocation of investments to Southeast Asia, in recent years. 

“People have to bear in mind that you need to be independent [economically too], since China uses economics as leverage.”
Surveys suggest that the pro-independence-leaning president has public sympathy on the issue. 

The latest survey by Academia Sinica shows that a majority of Taiwanese prefers an emphasis on national sovereignty over economic engagement with China.
In the Philippines, the pro-Beijing President Rodrigo Duterte is also facing massive public backlash, especially amid his blatant quiescence following the sinking of a Filipino fishing boat by a suspected Chinese militia vessel last month.
The most recent surveys show that a super-majority of Filipinos want the government to take a tougher stance against Beijing, with as many as 93 percent of Filipinos calling on the government to take back Philippine-claimed islands in the South China Sea currently occupied by China. 

More than eight out of ten Filipinos, the same survey shows, want the government to form alliances with like-minded nations and international organizations against China’s maritime expansionism.
Additionally, China’s trust rating in the Philippines is now at a new low. 

One recent survey, conducted from June 22 to 26, showed that the majority of Filipinos (51 percent) had “little trust” in China. 

Another showed that China has a net trust rating of nearly 50 percent.
These anti-China sentiments have gone hand in hand with growing fears over “debt traps” being set under Beijing’s infrastructure investments.
“We should do away with placing our government commercial assets [as] collateral,” Philippine Supreme Court Justice Antonio Carpio, a prominent voice on the Philippine-China relations, told this author.
He has accused Beijing of negotiating questionable contracts that would allow China to seize key Philippine assets, including oil and gas in Philippine waters, in the event of a debt default.
“Let’s not be naïve [with Chinese intentions],” he added, citing the infamous case of Sri Lanka, which had to give up the control of the Hambantota port to a Chinese company following a major debt default.
Under growing public pressure, Duterte had to call for a review of all infrastructure contracts with China.
In neighboring Malaysia, however, anti-China backlash propelled an all-out regime change, as Prime Minister Mahathir Mohamad rallied popular support by accusing his predecessor, Najib Razak, of selling out the nation to China under questionable multi-billion-dollar infrastructure investments.
“If you borrow huge sums of money you [will eventually] come under the influence and direction of the lender [China],” Mahathir told this author earlier this year, underscoring the threat of Beijing’s “new version of colonialism.” 

He warned of strategic “subservience” if smaller nations like the Philippines and Malaysia borrow from China beyond their “capacity to repay.”
In Indonesia, Southeast Asia’s largest nation, anti-China sentiments have taken a dark xenophobic turn even. 

Welcoming closer economic ties with China, incumbent President Joko Widodo repeatedly came under vicious attacks by his rivals during both his presidential campaigns, including false claims that he is of ethnic Chinese background.
In response to China’s intrusion into Indonesian waters, the Jokowi administration has stepped up its military presence in the North Natuna Sea area, while adopting a tough “sink the vessel” policy against illegal Chinese vessels. 

China’s perceived infringement on Indonesia sovereignty has led to a steep decline in its trust ratings. According to a Pew Research Center survey, favorable views of Beijing among Indonesians dropped from 66 percent in 2014 to 53 percent in 2018.
But perhaps it’s in Vietnam where Chinese is experiencing the greatest resistance. 

Recent years have seen massive, and often violent, anti-Beijing protests against Chinese investments in the country. 

One of the most protested schemes is the proposal for the establishment of a Chinese special economic zone on a ninety-nine-year-lease.
Meanwhile, in recent weeks, Vietnam has deployed several armed vessels to forestall China’s efforts to sabotage its energy exploration activities in the Vanguard Bank, an energy-rich area within Hanoi’s EEZ that is contested by China
China may be able to strong-arm each of its neighboring polities on a bilateral basis, but Beijing is bleeding credibility and trust across the region. 

No wonder then, the majority of respondents across Asia still prefer the United States over China as a regional leader. 

Even in Hong Kong, American flags were proudly on display during the protests. 

As one of the participants said: “We are not fighting to gain anything, [but] we are fighting not to lose anything. I am worried about Hong Kong becoming China.”

The Coming Collapse of China

PREPARING FOR CHINA’S RAPID RISE AND DECLINE
By COLLIN MEISEL AND JONATHAN D. MOYER

China’s rise, one of the defining U.S. national security challenges of our time, has deservedly received attention in each of the last decades-worth of unclassified U.S. government strategies. Unfortunately, China’s pending decline — the one that is likely to occur soon after its rise — has received significantly shorter shrift, earning brief references to an aging population in Northern Asia in the 2015 and 2011 versions of the National Military Strategy.

And yet, China’s rapid transition toward a downward trajectory will pose a unique set of national security challenges for the United States that could prove even more difficult than those posed by China’s rise. 

If this lack of high-level public discussion translates to lack of action, it will be to the detriment of U.S. national security. 

The time to prepare for China’s descent is now, while the challenges that come with it still sit at the edge of the discernible future, and not at the edge of American shores.
By the discernible future, we are not speaking of determinism or an inevitable consequence of events set in motion long ago. 

These are the wares of soothsayers and snake oil salesmen. 

Rather, we are speaking of long-term trends that can readily be forecast — trends such as shifting demographics, economic growth, and government spending — which can be persistent and generally follow long-standing patterns that have been common around the world and across time.
Through this lens, long-term trends indicate that China’s development is on a positive trajectory in one sense. 

The Chinese economy has enjoyed consistent growth for the past several decades and, according to International Monetary Fund estimates, it is on track to claim the title as the world’s largest economy in terms of market exchange rates by 2030. (In terms of purchasing power parity, China already holds the top spot.) 

Barring any unforeseen catastrophes, PricewaterhouseCoopers projects that China’s economy will continue along this path, accounting for 20 percent of the world’s gross domestic product at purchasing power parity by 2050. 

This long upward economic path has in part been driven by China’s one- and two-child policies, which have allowed the nation to avoid the burdens accompanied by the burgeoning population and destabilizing youth bulge common among other developing countries.
As the long-term consequence of its one- and two-child policies, however, China will soon be confronted with an aging working population. 

This is likely to translate into declines in annual gross domestic product growth, increases in health expenditures both per capita and as a share of gross domestic product (perhaps as much as 10 percent by 2030 when pensions are included), and, ultimately, potential declines in material power. 

Indeed, forecasts of the Global Power Index, a measure developed in coordination with our own Frederick S. Pardee Center for International Futures and used in one of the National Intelligence Council’s Global Trends reports, suggest Chinese general capabilities will peak and immediately begin to decline near the year 2050 — just two decades after its material power surpasses the United States in approximately 2030. 

This decline is forecast to continue through the end of the century, and, while China is likely to remain the single-most powerful country during this time (with a forecasted 19.2 percent of the world’s power in 2100 relative to India’s 14 percent and the United States’ 13.2 percent), its material power is never forecast to exceed the likes of NATO (with a forecasted collective share of world power at 29 percent in 2100).
Notably, these measures capture general material capabilities, but are not so refined as to be used to understand how effectively these capabilities are expressed. 

To be sure, nations with different resource availability can leverage their material capabilities in more or less effective ways. 

Thus, while China is expected to have the potential for growing material superiority in the coming 30 years followed by a sudden, swift atrophy, its strengths in some areas are likely to persist (e.g., supply-chain and debt dependencies stemming from One Belt, One Road) while experiencing continued — and perhaps growing — weakness in other areas.
For example, China’s military has yet to accrue combat and other technical and leadership experience to anywhere near the breadth and degree of the U.S. military or that of many U.S. allies. 

Even subtracting this human element, the tremendous capital stock in high quality materiel and technological expertise the likes of that possessed by the U.S. military cannot be built overnight — certainly not with China’s military spending having held at only 2 percent of gross domestic product over the last 17 years — nor can it be stolen. 

Acquisition and mastery of technology is often an expensive, decades-long process — one that may require more time than China has as it grows old before it gets rich.
Meanwhile, the United States enjoys several relative structural advantages. 

Demographically, the median age of the U.S. population has grown and is forecast to grow at a much lower rate than China’s in the coming decades. 

Specifically, the U.S. population’s median age is expected to grow from 38 to 43 from now to 2050, as compared to the Chinese population’s transition from and 38 to 48, according to Pardee Center forecasts. 

To place these numbers in context, the U.S. population in 2050 will have an average age similar to Japan nearly two decades ago while the Chinese population will have an average age similar to Japan today, which Prime Minister Shinzo Abe states is facing a “national crisis” due to an aging society. As for the material wealth of the average Chinese and American in 2050, the Pardee Center projects that China’s gross domestic product per capita at market exchange rates will be roughly equivalent to the United States’ gross domestic product in 1992, at $37,200 in constant 2011 U.S. dollars. Meanwhile, the average American is expected to be more than twice as wealthy, with a forecasted gross domestic product per capita of more than $80,500.
Militarily, the United States possesses an entire generation, arguably two, of seasoned combat veterans. 

Even among non-combat veterans, the U.S. military’s pipeline for training technically skilled warfighters across an array of specialties continues to be the envy of nations the world over, including China. 

And while health care costs in the United States are exorbitant and continue to rise, this is the result of regulation-related policy choices that are not bound to America’s demographic structure, with similarly developed nations spending half as much per capita. 

In other words, structural advantages tell us that the United States is likely to stick around at the top of the global pecking order as China is on its way back down.
While power transitions in and of themselves are contentious business, one can imagine the added drama injected by the Chinese Communist Party as it strives to maintain power — both internally and on the world stage — wary of seeing China return to its much lamented 19th century status as “the sick man of Asia.” 

To be sure, even as the nation declines, Chinese leaders will have extensive material capabilities and a vast network of relational influence at their disposal should a power struggle ensue. 

As Vladimir Putin’s Russia has illustrated from the Donbass to the Democratic National Committee, declining material powers can still wreak havoc in the international system and stymie U.S. strategists’ goals. 

Thus, none of this is to say that China’s decline will be uniform across all fronts material and relational. 

Rather, China’s decline in the material sense may embolden its leaders to strive to achieve its foreign policy objectives by aggressively employing other means (again, see Putin’s Russia), possibly leading to miscalculations and misperceptions that war between a materially-declining China and a relatively materially-steady United States is somehow inevitable.
As Great Britain illustrated at the turn of the 20th century, blood-free great power transitions can in part be assured by the declining hegemon tactfully ceding leadership to its aspiring successor. 

As China rises, the United States can do the same. 

While China can choose to cede its eventual leadership as well, will it? 

The rapidity of the transition between China’s swift growth and subsequent atrophy is virtually unprecedented for a major peacetime power, leaving strategists pondering this question in uncharted waters.
Still, long-term strategy requires thinking about such questions now, as whatever set of answers strategists devise will likely require the establishment or strengthening of relational influence via resilient bilateral and multilateral economic and diplomatic ties, or perhaps a continued U.S. military build-up “like we never have before” to correct for the United States’ presently weakening hand. Specific economic policy options include rejoining the Trans-Pacific Partnership — a move which a few remaining members of the renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership have actively encouraged but admittedly faces immense hurdles at this point in time — and embracing rather than further weakening the World Trade Organization. 

Both would bake-in structural economic advantages for the United States relative to China in the Indo-Pacific and the world more generally, with the former coming with the added benefit of signaling continued U.S. strategic interest in the region. 

On the military front, the United States would be wise to continue to further deepen ties with India and encourage a transition from Russian to American weapons systems, moves that would help de-conflict the United States’ and a rising India’s foreign policy interests (thus avoiding dual power struggles with one current and another rising power in the Indo-Pacific).
Given that these and similar policy options require sustained execution, they would also greatly benefit from codification in future U.S. national security strategy documents by sending signals to both internal and external actors of their continued importance.
Perhaps more boldly, strategists could work to convince policymakers that that the U.S. Department of Defense’s desire for three to five percent real growth in its budget through 2023 would in fact likely be counterproductive in the long-term struggle between U.S. and Chinese hegemony.
This does not mean that the U.S. military should cease investing in emerging technologies or attempting to retain its competitive edge.
Rather, it simply means that U.S. policymakers must balance these priorities with other concerns that could erode America’s structural advantages relative to China, such as the need for sustained inward migration in the United States to avoid an aging crisis, and pension reform to sustainably manage the aging that will occur, avoiding Social Security’s possible insolvency by 2035.
Likewise, policymakers might be urged to increase rather than cut foreign aid, which would enhance developing nations’ stability and decrease their dependence on Chinese investments.
The great deal of political and real capital necessary to achieve these goals could require redirecting the increases currently being requested by Department of Defense officials, but these reforms’ long-term impact would underwrite American power in ways that are unlikely to risk becoming obsolete.
More generally, U.S. strategists should adopt what B. H. Liddell Hart coined an “actively conservative” mindset.
Neither a strategy emphasizing military dominance nor complacency nor appeasement, an actively conservative foreign policy appreciates that preparation for conflict is necessary while also recognizing that self-exhaustion — perhaps through unsustainable increases in military spending or failure to address other pending fiscal crises — is as potent an enemy as any external foe. Furthermore, in dealing with external foes, active conservatism requires suppressing the “immoderate desire for the immediate satisfaction of outright victory.”
In other words, it is taking the long view.
China’s rise is, at this point, glaringly apparent.
The discernible future suggests that the same is true of China’s subsequent decline.
Preparation for this reality must begin now so tomorrow’s strategists may reap the benefits that strategists managing China’s rise lack today.

Trade war raises the spectre of a ‘China collapse’

The impact on China’s economy could destabilise a country already dealing with the twin problems of low public trust and unresponsive government bureaucracy. But although change is inevitable, an eruption of public anger is not
By Deng Yuwen

The “China collapse theory” was popular in the international community 10 years ago. 

However, with China becoming the world’s second-largest economy and exerting a growing international influence, despite the chorus of doom, such talk has died down.
Yet, taking the long view, 2018 is shaping up to be a turning point for China. 

Today the country faces serious internal and external challenges, and is in the midst of a social transformation.
Given the Chinese government’s ability to maintain stability, the transformation is unlikely to be a radical, dramatic rupture. 

Rather, the change may be cumulative. 

Like the proverbial frog in a pot of water that’s gradually brought to a boil, by the time people realise a transformation has happened, it will already be in place.
Looking at the changes that have quietly taken place in Chinese society this year, it is obvious that a transformation is gestating.
Firstly, people’s trust in the authorities has fallen to freezing point, whatever their political leaning. 

The recent Changsheng vaccine scandal illustrates this development.
Substandard vaccines directly affect the health and safety of children. 

When a government cannot even guarantee children’s basic safety, public trust in government is an unaffordable luxury.
Food and drug safety scandals are not new in China. 

What’s different this time is that people’s expectations of the government have changed. 

For five years, the current government has led a robust campaign to root out corruption in the government and party. 

Although it has yet to bring tangible improvements in people’s livelihoods, it nevertheless raised expectations that it could at least ensure a safer, more secure life for most. 

This was its promise.
However, the Changsheng scandal made clear that more than five years of the most severe social controls could not even get a vaccine problem under control. 

The Chinese people, especially growing children, still live in an unsafe environment. 

So why do they need this unprecedented level of social regulation?
Public antipathy has grown more widespread. 

After similar scandals in the past, the far left in Chinese society would typically voice their unconditional support for the authorities. 

This time, most have maintained a rare silence, even if they have not directly criticised the government.
When the public condemns the authorities in unison, when even the most basic trust is lost, it is a sign that a regime has lost its legitimacy. 

For this to happen when the authorities are trying to forge a “new era”, alarm bells should ring.
Secondly, the Chinese governance system has lost its ability to perceive and respond to social discontent. 

Individuals within the government, including high-ranking officials, are aware of the maladies afflicting society, of people’s discontent, and of the desperate need for a cure – to scrape the poison off the bone, so to speak.
But as an organisation, the government appears to have lost this sensitivity. 

It has become very slow to react to public dissatisfaction, much less respond effectively.
In game theory, this is explained by the “prisoner’s dilemma”, in which rational individuals who make decisions for their own benefit collectively lead to a poorer outcome for all, including themselves. 

And an organisation that allows this to happen will have failed as a system.
In China’s case, the polarisation of the leadership in recent years, leading to a high concentration of power in the hands of one person, has exacerbated the problem of the follow-the-leader phenomenon that existed in the past. 

Information is not properly disseminated within the system, and most officials become passive and just wait for orders from their superior.
Take the vaccine scandal. 

Even after news of the irregularities led to a public outcry, local authorities were still sitting on their hands. 

The highest leader of the land had to give instructions for action before the government machinery jumped to tackle the problem, holding meetings and launching investigations.
After 40 years of economic reforms, Chinese society has amassed too many contradictions. 

Public dissatisfaction with the authorities is well known. 

Even the most desensitised person could feel it. 

Yet the government appears insensitive to it. 

Because the bureaucrats in the system don’t want to take responsibility, all they can do is push the responsibility to others. 

System-wide, inertia dominates.
If this inability to effectively respond to social grievances persists, the system will slowly lose all its vitality.
Thirdly, the economic impact of the trade war with the United States is likely to exacerbate the crisis in Chinese society.
So far, the tariffs imposed on Chinese goods have caused China’s stock and currency markets to fluctuate and public pessimism to spread. 

Even after the initial shock wears off, the tariffs’ impact on China’s employment, prices and financial system will be very real.
Depending on how the conflict develops, we may see large-scale business closures, a rise in unemployment and serious inflation. 

If the economy sinks into a recession, living standards may fall sharply.
Since reforms began, there have been highs and lows in the Chinese growth story. 

Western sanctions imposed after China’s crackdown on the pro-democracy protests of June 1989 led to some hardships, but people tolerated them. 

The difficult days of the Cultural Revolution were not so far behind then, and living standards weren’t high to begin with.
Things are different now. 

Many of those born in the 1970s and after have not gone through the poverty their forefathers experienced. 

If living standards fall sharply for them and their family because of the trade war, how will they adapt and will there be a chain reaction? 

Some scholars have warned that the trade war might trigger an eruption of public anger.
Chinese society is poised for change. 

For the authorities, 2018 will be a big test of their ability to govern. 

Whether they pass or fail, one thing is clear: an overall restlessness is appearing in society and people are crying out for changes to the system.
Without such changes, the government leadership will only be able to delay the outbreak of a crisis if they handle the situation well under the current constraints, or they will accelerate the transformation if they mishandle the situation.

The Coming Collapse of China

Can China Survive President Trump?

By Tom Orlik & Michael Pettis

This week, Xi Jinping will attend the Davos forum for the first time -- a sign of how concerned China is about a possible retreat from "globalization". 

Till now, easy access to world markets has underpinned the country's expansion. 

How badly Chinese growth could be hurt by new trade barriers may be the most pressing question facing the world economy. 

Beijing University professor Michael Pettis, one of the best-known China skeptics, is gloomy.

Orlik: President Donald Trump’s talk of tariffs and the rise of populist nationalism evident in the Brexit vote are warning signs of a coming storm. At this point, though, there’s no way of knowing how severe the storm will be. The history of U.S.-China relations shows tough talk on the campaign trail rarely translates into action in office.

Michael Pettis: You may be right, Tom, but the global economy continues to be distorted by huge trade imbalances. 

The worst offender is Germany, whose record-breaking surpluses just keep growing. 

Meanwhile Japan is running large surpluses again after five years of deficits. 

These and other large surpluses are driven not by rising productivity but rather by structurally weak domestic demand, and in most cases this weak demand isn’t being addressed except by being exported. 

China is one of the few surplus countries that has actually improved domestic demand, driving its current account surplus down from 10.1 percent of GDP in 2007 to under 3 percent today. 

In absolute terms, however, China’s surplus is barely 10 percent below its previous peak.
To make matters worse, while collapsing commodity prices until recently forced commodity-exporters to absorb part of these imbalances, they no longer can do so. 

Nearly half the responsibility for absorbing foreign surpluses now falls onto U.S. consumers. 

That's why, even if Trump is bluffing, this problem isn't going away.

Orlik: Here's another way of looking at those China numbers: With the current account surplus down to 2.7 percent of GDP, trade is clearly a smaller contributor to growth than it used to be. Even if Trump did erect major trade barriers to Chinese goods, perhaps even the 45 percent tariffs he's talked about, the costs to China wouldn't be as great as many imagine.

Michael Pettis: It depends on how quickly it happens. 

To achieve last year’s GDP growth target, Chinese debt had to grow by a gut-wrenching 40 percentage points of GDP. 

Every one-point contraction in China’s trade surplus raises that amount by nearly one-third. 

As things stand, China probably has little more than two to four years in which to reverse its dependence on debt. 

Another credit-fueled stimulus would just give Beijing even less time.
Ultimately the only meaningful way to reverse China’s debt dependence is to boost consumption as a source of growth. 

Yet with household income at just over 50 percent of GDP, among the lowest in history, Beijing must raise household income even as it cuts back investment. 

This won’t be easy: It requires aggressive reforms that effectively transfer wealth from local governments to ordinary households. 

China has been trying to do this since 2007, but political opposition from so-called vested interests has been, as you know, ferocious. 

Even if this year’s Party Congress centralizes decision-making enough to allow Chinese leaders to implement the necessary reforms, it could easily take two to three years before the impact is felt.
China was always unlikely to have a financial crisis, but the more debt there is, the more downward pressure there will be on the economy, which means growth will drop substantially whether or not there is a crisis. 

A contraction in trade just makes a bad problem worse.

Orlik: All valid points, Michael. But I’d place the emphasis slightly differently. Household consumption is already doing some work to offset weak exports; it's been rising as a share of GDP since 2010. Higher wages, increased returns on savings and improved welfare coverage are all gradually adding to stronger consumption. Direct subsidies -- like the tax cuts that boosted auto spending in 2016 -- can accelerate the trend.

Michael Pettis: Growth in household consumption is certainly becoming a bigger share of GDP growth, but largely because decelerating growth in investment and net exports automatically raises the consumption share. 

This is just passive rebalancing, and at this pace it will take nearly a decade before consumption meaningfully drives the economy. 

As for shifting credit allocation to the new economy, this has always been a bit of a red herring. 

New-economy consumption has certainly grown quickly, but mainly by cannibalizing old-economy consumption. 

It is consumption growth overall that must drive the economy, and consumption is necessarily constrained by the growth in household income.
In the near term, ironically, none of this might seem relevant. 

Chinese capital is pouring into the U.S., in part because of trade worries, and the U.S. current account deficit must automatically rise with net capital inflows. 

In the next year, in other words, China’s trade surplus might actually rise along with the American deficit. 

As long as it depends on such surpluses to resolve domestic demand, the Chinese economy will remain vulnerable to trade war.