China is too big for a Soviet Union-style collapse, but it’s on shaky ground

China is currently facing economic difficulties. The rate of growth is slowing down considerably, and the previously booming real estate market has collapsed. Moreover, unemployment rates are increasing.

Why does it matter, you may ask? Every nation goes through challenging times when previous indulgences come back to haunt it. Eventually, the economic pattern shifts and the healing process starts. China, being the world's second largest economy, has experienced tremendous growth in the past forty years. It holds a crucial position in the global economy and has made significant investments in advanced manufacturing and artificial intelligence. Certainly, it faces obstacles, but it will overcome them with minimal damage.

However, some nations never bounce back. The Soviet Union was a centrally planned economy that swiftly fell apart in the late 1980s. In hindsight, it was clear why this catastrophic event was inevitable, but back then, when the Kremlin was positioning SS20 missiles throughout Eastern Europe, it seemed far from it.

Here's another perspective to consider. China's impressive economic growth has come to an end. Recent events, such as the depreciation of their currency, declining prices, and the financial pressures faced by the housing market, all indicate a more profound problem. The ruling Communist party will need to implement fundamental economic reforms that will require loosening its tight grip on political control. China's leader, Xi Jinping, portrays himself as a powerful figure and is unlikely to make any compromises for the sake of freedom and democracy. Ultimately, China's fate may resemble that of the Soviet Union.

This idea might seem unlikely, and it does have some truth to it. The Soviet Union had a much smaller economy compared to China, and its involvement in global supply chains was not as significant. In contrast, China plays a crucial role in the world economy, unlike the Soviet Union ever did.

According to Dhaval Joshi from BCA Research, China has been responsible for 41% of global economic growth in the last decade. This is nearly twice the amount contributed by the United States (22%) and significantly more than the contribution from the euro area (9%).

To clarify, out of the 2.6% actual increase in the global economy over the past decade, China has contributed 1.1 percentage points, whereas the United States and the euro area have only contributed 0.6 points and 0.2 points respectively.

China had a significant role in driving global growth due to its economy expanding at a rate of approximately 8-9% annually. However, its growth rate has now decreased by half, resulting in its contribution being reduced to around 0.5 points. Additionally, China's future growth rate is expected to decline even further. Some economists anticipate that by the end of the decade, China's trend rate of growth will be approximately 2%, similar to that of the United States.

These predictions might be too hasty. Beijing's objective is to achieve slower yet more stable and sustainable economic growth. The reasoning behind this approach is that policymakers should refrain from rapidly reducing interest rates, increasing government expenditure, and intervening in the property sector whenever there is a slight indication of difficulty. The optimistic argument for China is that its combination of restricted economic freedom and political oppression has proven effective since the Deng reforms in the 1970s and will remain so in the future with some adjustments.

In 1985, when Mikhail Gorbachev assumed control in the Soviet Union, he implemented a two-pronged strategy: "glasnost," promoting openness and transparency, and "perestroika," an effort to reform the economy after a prolonged phase of stagnation. The downfall of the Soviet Union can be attributed to the greater emphasis placed on glasnost, rather than perestroika. China's leaders took note of this and opted to prioritize restructuring while paying less attention to glasnost.

Up until this point, prioritizing the advancement of China's economy rather than democracy has proven to be successful. However, despite the assurance from policymakers in Beijing that everything will continue to be prosperous, there are indications that those who are pessimistic about China's growth outlook may be correct. It is not only due to the fact that the anticipated rapid recovery following the removal of lockdown measures has diminished, but also because the economy was already exhibiting signs of sluggishness even prior to the emergence of Covid-19.

In an article for Foreign Affairs, Adam Posen, the head of the Petersen Institute for International Economics, mentioned that China has been grappling with a prolonged economic downturn resembling the persistent effects of Covid-19 since the mid-2010s.

From 2015 onwards, the proportion of bank deposits in relation to China's GDP has increased by 50%. On the other hand, the consumption of long-lasting goods by individuals in the private sector has decreased by approximately one third compared to the beginning of 2015. Surprisingly, instead of experiencing a surge in demand due to pent-up needs, this decline has continued even after the economy reopened. Moreover, private investment has plummeted by two-thirds since the first quarter of 2015, with an additional 25% decrease since the commencement of the pandemic.

"These patterns signify the collective economic choices made by individuals and businesses, indicating a growing apprehension in China towards the possibility of losing control over their assets. As a result, they are now placing greater importance on immediate cash flow rather than long-term investments," Posen explains. He further emphasizes that these concerns have been magnified by the intense and continuous nature of China's lockdown measures.

Prior to the Covid pandemic, China faced significant challenges. It grappled with an increasingly older population and, despite experiencing four decades of rapid economic expansion, it remained categorized as a middle-income nation. Its growth rate was artificially boosted by lavish public spending and support provided to inefficient businesses that would have otherwise failed.

With that being said, observing the global scenario indicates that autocratic governments can maintain their control over the population even during periods of sluggish economic growth or soaring inflation rates. If any changes were to occur in China, they are more likely to be gradual rather than swift, and in such a case, we should express our appreciation. The abrupt downfall of the Soviet Union resulted in a worldwide economic upturn. Conversely, if China were to experience a sudden collapse, it would trigger a global economic downturn.