The greatest Chinese threat is an economic implosion

Harlan Ullman

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Today's Paul Reveres have been sounding the alarm "the Chinese are coming" for at least a decade.

Given more aggressive Chinese actions to steal intellectual property; establish "police stations" to surveil its citizens residing in U.S. cities; and to fly over the United States with "spy balloons," more Americans are heeding these warnings of impending danger.

The expansion of China's military and militarization of tiny islets in the various surrounding seas, along with the threat to retake Taiwan by force if necessary, are also powerful signs of growing Chinese assertiveness and intent of imposing greater influence regionally and globally.

China's "no limits" partnership with Russia and its support of Moscow in its "special military operation" in Ukraine likewise challenges nations that are committed to assisting Kyiv in defeating the illegal and unwarranted invasion now in its 18th month.

And China's growing economic might is set to disrupt the rules-based international order imposed by the United States and its Western and Asian allies and fellow democracies. Thus, it is easy to accept that China is far more than just a competitor as the House Select Committee on the Strategic Competition between the U.S. and Chinese Communist Party no doubt will ultimately conclude in its findings.

What else should concern not only this committee but Americans who worry about China?

Consider the even more serious consequences of possible outcomes that could be failures of imagination, not only by thinking outside the box, but to discard the box entirely. This is what happened in Vietnam, Afghanistan and Iraq after 2003.

Suppose the greatest threat posed by China is an economic implosion, What would be the global impact? The answer is probably catastrophic as China's economy is second in GDP to the United States. If purchasing power is the metric, China's would be larger.

Rather than using quantitative analysis on the grounds that figures often lie and liars figure, a qualitative approach is more revealing. China is experiencing very slow economic growth and a price deflation. It has a huge debt problem; it faces demographic crises of an aging and smaller population; and unemployment of the 18-to 25-year-old cohort is perhaps 1 in 5 out of work.

The fundamental flaw is that the lion's share of China's economy is based on the property, real estate and construction sectors. It has so leveraged all these sectors to create not only a bubble but a papier-mache foundation for its economy that, when stressed, could collapse. This is how economic disasters occur.

In 1929, buying stocks on small margins caused the Great Crash when equity calls came into play. Shareholders lacked liquidity. In 1987, the run on the Russian bond market caused the initial big hiccup in the Dow. In 2008, credit default swaps were wrongly predicated on the assumption housing prices always increased. That proved wrong. While these were single points of failure, each was able to bring the financial and economic houses down, triggering other systemic flaws.

China suffers from similar weaknesses. As all property is state-owned, it has been doled out to provinces and cities that in turn sold land to entrepreneurs and construction companies taking a slice of the action both to finance government and often enrich office holders. All this is well documented in The New China Playbook by Keyu Jin, as well as other sources.

The slowdown and indeed dramatic decline of property market values choked this economic engine of financial growth. That, in turn, has adversely affected virtually the entire country, leading to deflation. The Trump administration tariffs, extended by the Biden administration, have likewise harmed the Chinese economy, as well as shifted the increased costs of Chinese imports to American consumers.

Beginning next year, the administration is imposing further limits to U.S. investment in China's technical sector, part of building "a big fence around a small yard" and de-linking with its economy. The result will exacerbate China's growing economic problems, hastening a potential crisis. Hardliners here will welcome that, not appreciating what damage a Chinese economic implosion, if it comes, will have on the U.S. and global economies.

What can be done?

First, it is in U.S. and global interests not to force, precipitate or contribute to a Chinese economic collapse. Rather than the president publicly calling China's economy a "ticking time bomb," would it not be smarter to pursue a private dialogue to see how that disaster could be averted? Senior members of the administration have visited China. But if this ticking time bomb is real, are we going to help defuse or detonate it?