The End of China's Rise

Still Powerful But Less Potent

A man covers his face as he reads information displayed on an electronic screen at a brokerage house in Shanghai, May 17, 2010. Reuters

Over the past three months, uncertainty over the course of Chinese development has intensified, with a steady flow of mostly bad economic news: yet another plunge in the stock market, which was already crumbling and kept afloat only by massive state intervention; mounting corporate debt; and a hemorrhaging of foreign exchange reserves, to name a few. The reality is that China is staring economic stagnation in the face, and the ruling Chinese Communist Party (CCP) is panicking. The party appeared to have acknowledged the seriousness of its economic woes, which can only be worsened by a declining and aging labor force, when it announced in late October that it would replace its decades-old one-child policy with a two-child policy in March. China desperately needs more young people not only to fill the factories and staff the offices and schools but also to increase consumption so that the country can shift from an investment- to a domestic consumption–led model of economic development.

But such a strategic shift cannot possibly succeed in time to prevent China’s rise from ending. Not only must there be a period of time after slashing investment (which is only barely beginning now) to allow private consumption to step in to fill the void in demand, but slashing investment itself will also reduce demand for consumption in absolute terms; people will lose their jobs, and the already heavily indebted corporate sector will earn less money to invest in sectors that genuinely need investment. No country in history has relied as heavily on investment to both fuel GDP growth and maintain the existing structure of GDP as China. But as investment increases relative to domestic consumption, a country can either increase its exports to sell off the surplus production or else double down and invest even more, hoping for a miracle down the road. China rapidly increased its exports during the 2000s, but all that had to end when the global financial crisis hit in 2008. After the crisis,

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