Mike Konczal basically tweets my deepest fears for 2016 here:

For today, let’s focus on the China imploding part of this narrative. Because as much as Donald Trump’s appeal is based on this …

… it’s remarkable just how bad Trump has been about reading other countries’ economies. This is particularly true with respect to China. Consider the following stories:

1) The latest issue of Foreign Affairs. The March/April issue is chock-full of Sino-pessimism. Robert D. Kaplan eeyores his way through Chinese and Russian weakness and how that’s problematic about world politics. Now Kaplan has been writing “everything is awful” essays since he was a wee geopolitical traveler, so that’s not new. Pankaj Ghemavat and Thomas Hout’s pessimistic essay about Chinese firms, on the other hand:

Th future of China’s economic power will depend less on when the country’s GDP passes that of the United States and more on the progress that Chinese firms make in manufacturing and selling capital goods and high technology. Foreign multinationals still dominate China’s home market in advanced capital goods, and China remains broadly dependent on Western technology. In the areas that will matter most in the twenty-first century, Chinese companies have a long way to go, which should give pause to anyone confidently predicting a not-too-distant era of Chinese economic dominance.

So maybe China has some long-term challenges ahead. What country doesn’t? But when we move to the short term:

2)  China is shedding its foreign exchange reserves. It’s very amusing to hear Trump talk about how China is keeping its currency undervalued, because the foreign exchange reserves data shows that China has been intervening madly to prop up the value of the yuan. CFR’s Benn Steil and Emma Smith have a chart and everything:

In text form:

The People’s Bank of China has been selling off foreign currency reserves at a prodigious rate to keep the RMB stable. At $3.2 trillion, China’s reserves still seem enormous. But they are down $760 billion from their 2014 peak, and $300 billion in just the past three months. As shown in the figure above, at the current pace of decline China’s reserves will, according to the IMF’s framework for reserve adequacy, actually fall to a dangerously low level in the spring. This means that China would be at risk of a balance-of-payments crisis, unable to pay for essential imports or service its dollar debt payments.

The New York Times’s Keith Bradsher reports on the same problem — and the ways it could weaken China’s ability to use its financial muscle:

Longer term, China looks less likely to commit its reserves to big projects that build up its image abroad, said Victor Shih, a specialist in Chinese finance at the University of California, San Diego. “When you’re losing $100 billion a month, you can’t afford to invest in a highway in the middle of nowhere or a railway in Pakistan that could be blown up,” he said.

Already, China’s economic slowdown is blowing an ill wind into other economies in the Pacific Rim.

Still, China has a lot of foreign exchange reserves, and a return to more robust growth would cure some of these ills. Except …


3) China still hasn’t fixed its growth model. The opening paragraphs of this Washington Post article by Simon Denyer sum up the problem:

China’s industrial overcapacity is “sucking the oxygen out” of its economy, fueling a dangerous buildup in bad loans and now exacerbating trade tensions with the West. Yet although the Communist Party has been aware of the problem for years, it has failed to tackle it.
Those are the findings of a new report by the European Chamber of Commerce in China that blames complacency, a lack of leadership and protectionism by local governments for China’s failure to address the problem.
“We have heard the same soundtrack for years — ‘We are aware of the problem, we are going to deal with this,’ ” said Chamber president Jörg Wuttke. “But the problem is getting worse. Now we are asking: Do you have the audacity to implement your policies?”
China’s state-owned heavy industry expanded too far and too fast during the boom years, in a borrowing and investment splurge. Now, as the economy slows, there is too much industrial capacity chasing too little demand. Many plants have been forced to cut back output and are struggling to pay back loans, but, instead of closing down, these “zombie” factories are being kept alive, at a huge cost to the economy and the banking system.

Read the whole thing. And then read the European Chamber of Commerce’s whole thing.

China’s central bank is responding to the economic slowdown by encouraging a LOT of bank lending. That could unleash a lot of consumer spending and revive economic growth … or it could be staving off the inevitable reckoning of China’s credit boom.


Well, Xi Jinping has centralized his control of the Chinese state and Chinese Communist Party precisely to tackle such reforms. Except that …

4) Xi Jinping seems way more worried about his political power than economic reform. The New York Times’s Edward Wong notes that the rules of the game for foreign and Chinese media in China are changing:

“All news media run by the party must work to speak for the party’s will and its propositions, and protect the party’s authority and unity,” Mr. Xi told the gathered media officials on Friday, according to Xinhua, the state news agency.
Mr. Xi also wants to curb the presence of foreign media companies. Last week, government agencies announced a regulation that would prevent foreign companies from publishing and distributing content online in China. That could affect Microsoft, Apple and Amazon, among others.
Mr. Xi’s appearances on Friday were another major effort in his campaign to build a personality cult that equates him with the well-being of the party and the nation. The act of biao tai, or pledging loyalty, by newsroom leaders was one that Mr. Xi has demanded of military leaders and other important figures in the last year.

In his story, Wong also references a super-disturbing China Daily editorial about why Xi is so focused on control over the media right now:

It is necessary for the media to restore people’s trust in the Party, especially as the economy has entered a new normal and suggestions that it is declining and dragging down the global economy have emerged.
That’s why Xi has made the inspection and hosted the conference. The nation’s media outlets are essential to political stability and the leadership cannot afford to wait for them to catch up with the times.

So, to sum up: China faces significant long-term and short-term economic headwinds, and Xi is responding by consolidating his political levers of power. Oh, and by banning “weird” architecture.

It’s entirely possible that I’m being too pessimistic here. One could argue that outside observers have long overestimated the resiliency of China’s economic system and underestimated the resiliency of its political system. Perhaps the latter will enable Xi to right the economic ship.

Perhaps. But if this is China when it’s winning, then I don’t want to see it losing.