Opinion

The Danger From China’s Coming Recession

Keith Naughton Public Affairs Consultant

China is going to have a recession. Not necessarily this year or next year, but it will. That’s just how economies work. How the Chinese government deals with its first capitalist recession is the great, dangerous unknown in world politics and economics. The frantic efforts China made to stop the recent stock market fall do not bode well for the future.

Ever since Deng Xiaoping began moving China to a capitalist economic model in 1978, the country has experienced non-stop growth. Combine an industrious, educated population with a large influx of foreign capital in a pre-industrial setting and you have the perfect set of ingredients for enormous economic growth. Further, given China’s size and the massive scale of its illogical Marxist organization, transforming China was guaranteed to take decades.

But the last 35 years was the easy part.

For any nation, the process of industrialization will yield very large gains as people move away from subsistence agriculture to more productive manufacturing and those remaining in the agricultural sector can take advantage of economies of scale to increase their output. The trouble comes at the end of this process where additional growth requires moving into knowledge-intensive industries where the coin of the realm is innovation and intellectual capital.

China now confronts a much more difficult economic future. The country cannot maintain the high growth rates of the past. And the fact is that economic growth in a capitalist system is inherently uneven. There are going to be years of high growth and there will be brief times of economic contraction.

The authoritarian government and its citizens have an unspoken grand bargain: the people get prosperity while the government keeps control. The Chinese government, like many governments, is most concerned about its monopoly on power. The last challenge to that monopoly in 1989 was met with tanks and gunfire.

The recent plunge in Chinese equities and the government’s frantic efforts to prop up the market are a window into the thinking of the country’s leadership: No downturns allowed. But there will be a downturn at some point and China could be a very dangerous actor when that happens.

The typical playbook when faced with domestic problems is to blame outsiders. In a recession, the Chinese government will need to distract the public, blame everyone but themselves and feed the economy. China could do that in several ways.

Go after foreign investments: China is not averse to attacking foreign investment, when politically suitable. In the past, attacks against Japanese companies were quietly encouraged. The government is currently cracking down on travel to the Macau casinos. Taxing, harassing, and even seizing assets owned by foreign investors is a tried and true policy of authoritarian governments. Property rights in China are what the state says they are – making for a potentially unstable future.

Stoke nationalism: China’s leadership has regularly stirred up nationalistic feeling, particularly against Japan. Riots and boycotts of Japanese products have been given unofficial sanction. In the past, the government has clamped down on such anger before it went too far. In a difficult economy, perhaps the government won’t be so quick to discipline its citizens – or even extend protests to western nations guilty of past colonialism.

Military adventures: China has been staking claims to islands and the nearby seas to an absurd extent. There have been a series of dangerous confrontations with Japan, Vietnam and the Philippines. Picking on its smaller neighbors would be a convenient distraction. But every confrontation brings with it the risk that someone starts shooting – and there’s a situation difficult to get away from.

Taiwan: For the past 30 years, mainland China and Taiwan have maintained a convenient stasis. China claims Taiwan is a renegade province. Taiwan functions as an independent nation in all but name. Meanwhile, both countries invest in each other. Would that change in an economic downturn? Would China move to seize Taiwanese investments on the mainland and make a play for “unity” – really annexation? Another potential place for severe miscalculation.

Nobody knows when China will dip into recession, but every day that goes by is one day closer. If there is one thing that is for certain, neither the Chinese government, nor the rest of the world are prepared for it.