Ten years on and still waiting for China's coming collapse
In the past decade, hundreds, possibly thousands, of books have been published in English about China's economy. Most have sunk with barely a ripple. One that did make waves, however, was The Coming Collapse of China by Gordon Chang, published in 2001.
Bucking the prevailing wisdom which held that China was an emerging economic and political superpower, Chang argued that China's economy was heading for a catastrophic breakdown and that its dysfunctional government was either unwilling or unable to implement the reforms needed to avert a crash.
'Beijing has about five years to put things right,' he wrote at the time, warning that failure to tackle the country's economic weaknesses would risk an explosion of popular unrest that would blow away the Communist Party for good.
Chang thought the most likely catalyst for his collapse would be China's accession at the end of 2001 to the World Trade Organisation. WTO membership, he argued, would expose the country's deeply inefficient state sector to international competition on its home ground.
Unable to hold their own, state-owned companies would be forced to lay off millions of workers and default on their loans, triggering a succession of bank failures. With an army of unemployed on the streets and the savings of millions of ordinary people threatened by the resulting bank crisis, China would be 'a lake of gasoline' only needing a match for the whole country to erupt in flames.
Ten years on, it's hard to think of an economic forecast that missed the target as widely as Chang's. But the American lawyer and academic, who has spent two decades working in China, remains unabashed.
He admits today that he was wrong about the impact of WTO membership. Instead of opening up to foreign competition, China's leaders managed successfully to restrict access to the country's domestic markets. By keeping the value of the yuan artificially low, they shut out foreign imports while ensuring the primacy of China's exports abroad.
Far from slowing, China's growth rate increased; an acceleration which allowed the leadership to postpone vital economic reforms. As a result, Chang says, except for the abolition of China's hated agricultural tax in 2006, economic liberalisation has stalled over the past 10 years. If anything, the process has gone into reverse, with the state gaining economic heft at the expense of the private sector.
Now Chang argues that this economic sweet spot has ended. With China's main markets in the United States and Europe facing a protracted slowdown, export orders are crumbling. And with their economies weak, the US and Europe will no longer be prepared to tolerate the naked mercantilism of China's currency policy. As a result, Beijing will no longer be able to count on export-led growth over the coming years.
Nor, he argues, will China's leaders be able to respond to a slowdown in trade by stimulating domestic growth with a massive credit expansion, as they did in 2009.
A new investment boom now would create little additional growth. China has all the airports and high-speed railways it needs for the time being. Ordering the banks to lend to state-backed projects now would lead to misallocation of capital on a huge scale, further weakening a banking sector already undermined by the 2009 stimulus programme.
Worse, stepping up lending now would severely exacerbate inflation. With much of the surplus liquidity created by 2009's lending binge still sloshing around the economy (see the first chart), Chang argues that China's inflation rate will stay high for many quarters yet even without fresh stimulus.
As a result, China could find itself experiencing rising inflation at the same time as slowing growth and rising unemployment.
That's the nightmare scenario. China's misery index, which combines the official unemployment and inflation rates, is already approaching its 2008 high (see the second chart). And if you believe, like Chang, that both inflation and unemployment are much higher than the official figures say, then the true level of economic pain being experienced by ordinary people is even higher still.
That puts Beijing in a nightmarish position. Any effort to stimulate growth and reduce unemployment will push up inflation, and any attempt to reduce inflation will suppress growth and cause job losses.
Either way, Chang argues that the risk of widespread popular discontent is high and rising.
Ten years on, he warns that 'all the elements are now in place for the general failure of China's economic and political system.'