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(Face it, dominance in space, in naval or air warfare, or in diplomatic relations needs a strong economy to last long.)

from https://www.theguardian.com/business/2023/aug/20/china-too-big-soviet-union-collapse-growth

China is too big for a Soviet Union-style collapse, but it’s on shaky ground Larry Elliott

With its growth slowing, China’s future is uncertain. We should be
grateful if the change is not sudden

The Chinese president, Xi Jinping. China has generated 41% of the
world’s growth in the past 10 years. Photograph: Leah Millis/AP
Economics viewpoint

Sun 20 Aug 2023 06.04 EDT
China’s economy is going through a rough patch. Growth is slowing and
its property bubble has well and truly burst. Unemployment is rising.

So what, you might say? Every country has difficult periods when past
excesses catch up with it. Eventually the economic cycle turns and
recovery begins. China is the world’s second biggest economy and has
grown at a stupendous pace over the past four decades. It plays a
pivotal role in the global economy and has invested heavily in advanced manufacturing and AI. Sure, it has problems but it will emerge from them relatively unscathed.

But there are countries that never recover. The Soviet Union was a
command economy that collapsed rapidly at the end of the 1980s. In
retrospect, it was easy to see why the terminal crisis was going to
happen, but it didn’t look that way when the Kremlin was deploying SS20 missiles across eastern Europe a few years earlier.

So here’s the alternative view. China’s economic miracle is over. What’s been happening in the past week – the weakness of the currency, the fall
in prices, the financial stress evident in the residential housing
sector – are all signs of a deeper malaise that will require the ruling Communist party to undertake structural economic changes that will
demand a loosening of rigid political control. China’s leader, Xi
Jinping, is a self-styled strongman who will not be
prepared to make any concessions to freedom and democracy. Sooner or
later, China will go the way of the Soviet Union.

This sounds far-fetched, which it is, to an extent. The Soviet Union was
a far smaller economy than China and was far less integrated into global
supply chains. China matters to the world economy in a way the Soviet
Union never did.

As Dhaval Joshi of BCA Research points out, China has generated 41% of
the world’s growth in the past 10 years, almost double the 22%
contribution from the US, and dwarfing the 9% contribution from the euro
area.

“Put another way, of the 2.6% real growth rate of the world economy
through the past 10 years, China has generated 1.1 percentage points,
while the US and euro area have generated just 0.6 points and 0.2 points respectively.”

China made up such a big slug of global growth because its economy was
growing at about 8-9% a year. Its growth rate is now half that – which
means its contribution will also have halved to about 0.5 points. What’s more, its growth rate is likely to fall further in the years to come.
There are some economists who think its trend rate of growth will be
about 2% by the end of the decade, similar to that of the US.

These forecasts may all be wildly premature. Beijing’s aim is to have
slower but better balanced and more sustainable growth, and the logic of
that is that
policymakers should avoid slashing interest rates, boosting state
spending and bailing out an overextended property sector at the first
hint of trouble. The bullish case for China is that its model of limited economic freedom coupled with political repression have worked since the
Deng reforms of the late 1970s and will continue to work in the future
given some recalibration.

When he took power in the Soviet Union in 1985, Mikhail Gorbachev had a twin-tracked approach: “glasnost” was the drive for openness and transparency while “perestroika” was the restructuring of the economy to end a long period of stagnation. The Soviet Union’s collapse was the
result of more progress being made on glasnost than perestroika,
something China’s leaders learned from. They pushed ahead with
restructuring but were much less interested in glasnost.

Until now, ranking economic growth over democracy has delivered for
China, yet despite the insistence from Beijing’s policymakers that all
will continue to be well, there is evidence to suggest those bearish of China’s growth prospects are right. It is not just that the expected
strong recovery following the lifting of pandemic lockdown restrictions
has fizzled out, because the economy was already displaying signs of sluggishness even before Covid-19 came along.

Writing in Foreign Affairs, Adam Posen, the president of the Petersen
Institute for International Economics, said China had been suffering
from “economic long Covid” since the middle of the last decade.

Since 2015, bank deposits as a share of China’s GDP have risen by 50%. Private-sector consumption of durable goods is down by about a third
versus early 2015, and has continued to decline since the reopening of
the economy rather than rise as a result of pent-up demand. Private
investment is down by two-thirds since the first quarter of 2015,
including a decrease of 25% since the pandemic started.

“Those trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies
are increasingly fearful of losing access to their assets and are
prioritising short-term liquidity over investment,” Posen says. These
fears, he adds, have been heightened by the severity and unrelenting
nature of China’s lockdown.

China had some serious problems even before Covid. It had an ageing
population and – despite four decades of rapid growth – was still only a middle-income country. Its growth rate was inflated by often wasteful
public investment and subsidies to uneconomic enterprises that would
otherwise have collapsed.

All that said, a look around the world suggests authoritarian regimes
can hold on to power even when growth is weak or inflation is high.
Change in China, if it comes, may be gradual rather than rapid and, if
so, we should be grateful. The sudden collapse of the Soviet Union was
followed by a global boom. The sudden collapse of China would trigger a
global slump.

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