The China Factor

For decades, China has demonstrated incredible growth fueled in part by its cheap and massive labor pool as well as a looser regulatory regime when it comes to safety and the environment. Most importantly, China demonstrated incredible growth in its debt.

“China might bluster about the superiority of its authoritarian form of capitalism, yet the evidence suggests deep fissures in China’s current economic model,” says Michael Gravier, professor of marketing and supply chain management at Bryant University.

The data is clear that China has liberalized somewhat over the past ten years even under President Xi’s leadership – and that the oft-touted benefits of the authoritarian economic model have, in fact, developed with this increased economic liberalization.

Unfortunately, says Gravier, China keeps backtracking on its opening-up experiments, and moving too slowly. Ultimately, China depends heavily on global trade and cannot develop by looking inward, a lesson grounded in current data which manifests in its history.

“China’s economy and supply chains may flounder for a bit longer, but over the next year or two the country will be forced to open up its economy more in order to nurture the benefits it sorely needs from an innovative and more open system,” observes Gravier.

The reason is simple: China relied heavily on debt-fueled growth in the past, but Evergrande is just the tip of the iceberg when it comes to China’s debt-bomb. China’s private company debt is among the highest in the world, and its municipal and local government debt was driven by risky investments. These debts and the meddling in markets by the Communist Party have depressed growth and driven away capital, and they may yet precipitate a currency crisis, meaning a devaluation of Chinese currency. That would rock world markets and deepen the “cold war” with the U.S. and its allies.

Gravier concludes by noting that avoiding a currency crisis requires strong economic growth. The strong expansion that China requires to prevent economic chaos and internal instability cannot occur until China modernizes and opens its economy, and the Communist Party will soon have to decide between furthering such reforms itself or dealing with the consequences of trillions of dollars of debt that it will no longer be able to service.

“Ultimately, China’s policies have been holding back its growth, and my prediction is that China will make the decision to liberalize key sectors of the economy. If that happens, expect growth to be explosive in relatively short order,” he says.

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