GORDON CHANG: China’s rising markets mask a fragile economy, social discontent

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China’s Communists are back in style, at least in international financial centers.

Foreign investors, who once called China “uninvestable,” are now pouring into the country’s equity markets.According to the Institute of International Finance, offshore inflows into Chinese equities in the January-October period were up 443.9% compared to the same period last year.

Observers, however, are not sure that’s a good idea.“Many investors have bought whole hog” into the narrative that “nothing will hinder the global ascendency of China,” writes Rana Foroohar of the Financial Times.Investors, she notes, believe Beijing has already won thetrade war with President Donald Trumpand is poised to dominate chips and AI.China, the thinking goes, is sure to be the new global hegemon.

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Even Foroohar, once a China bull, does not now share the optimistic line.The fundamental nature of the regime, she argues, makes China ill-prepared to lead the world.

Foroohar’s right.Look closer, and the bullish narrative appears faulty.

For one thing, the Chinese economy is flatlining.Underlying indicators suggest official gross domestic product figures are exaggerated.

Chinese president Xi Jinping seen in Serbia

China’s President Xi Jinping is pushing an exhausted economic model to the breaking point.(Oliver Bunic/Bloomberg via Getty Images)

More fundamentally,Xi Jinpingis pushing an exhausted economic model to the breaking point.For instance, decades of crazy over-investment in property produced a bubble.According to He Keng, a former senior statistics official,Chinahas enough vacant housing for the entire population of 1.4 billion.That extreme oversupply cannot be deflated without either a crash or, worse, a decade or more of Japanese-style stagnation.

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Xi also presided over the massive overbuilding of infrastructure, especially the high-speed rail network.Chinese rail technology is magnificent, but the system loses buckets of money, something that would be evident if China State Railway Group Co.properly accounted for capital costs and debt-servicing.

Xi, however, is not changing course.At the Communist Party’s Fourth Plenum last month, he revealed the 15th Five-Year Plan, which covers the half-decade beginning next year.The blueprint contemplates “high-quality development” through advanced technology.

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China, as a result, is developing the world’s most efficient manufacturing — the country’s “dark factories” are so automated that there are no lights on assembly lines because no humans are needed— and is flooding the world with its products.

“What makes China unique is not the technology but the political environment accelerating its deployment,” writes Desmond Shum, author of “Red Roulette,” on X.“In democracies, automation is slowed by elections, unions, NGOs, and courts.China has none of these shock absorbers.When the state pushes, the system moves.”

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China’s Communist Party has created an “engineering state.” Its leaders, says Dan Wang, author of “Breakneck: China’s Quest to Engineer the Future,” “treat society as a big engineering project, where people are yet another building material that the leadership just want to tweak and destroy if necessary.”

China’s “building material”—its people—are now extremely unhappy.This decade, gloom has descended over Chinese society, something evident during thestrict COVID-lockdownsand especially after the failure of the economy to snap back after the pandemic.

The pervasive pessimism has resulted in people “lying flat” or “retiring,” various ways of opting out of society.And people are either delaying or refusing to have children.This trend, in combination with other factors, will result in China losingthree-quarters or more of its populationthis century.

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No wonder, China’s intellectuals and social media users refer to this moment as their country’s “garbage time of history.”

In the meantime, Xi Jinping is not responding to the unhappiness in society other than by initiating acensorship campaignagainst “excessively pessimistic sentiment.” Most significantly, he is not willing to implement structural changes to put more money in the hands of thelaobaixing, the common folk.

Consumption now contributes about 38% of the country’s GDP, one of the lowest rates in the world.GivenXi’s pro-industrial policies, that rate will fall even further.

Xi is confident of his grip, although few economists, analysts or observers think his export-dependent plans are sustainable.The world’s markets are not big enough to absorb China’s factory production.

China’s President Xi Jinping talks after joining a group photo during the G-20 Summit in Rio de Janeiro, Nov.18, 2024.(AP Photo/Eraldo Peres)

“It’s a powerful manufacturing machine sitting on top of a brittle socioeconomic structure,” writes Shum, referring to China.“A combustible combination—and not an environmentforeign capital is eagerto underwrite.”

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For 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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