Is China headed for a ‘car crash’?

HONG KONG: Over the past 30 years or so, when China’s economy has been growing at supernormal rates, it has resembled nothing so much as a fast car that’s chugging merrily along on full throttle.

With each passing year, however, more and more signs of mechanical wear and tear - and of an overheated engine - are beginning to manifest themselves.

Iniquitous growth and disquiet over unchecked corruption in high places have, in recent years, led to increasing incidents of social unrest, a rising trade surplus, and perceptions about China’s unfair mercantilist practices threaten to drag the country into a bruising trade war; heightened pollution owing to lax environmental standards is choking future growth prospects; and fiscal strains are beginning to be felt.

Weighed down by these and other problems, will the speeding car that represents the Chinese economy crash on the road to high growth? That’s the $2.6 trillion question on most China watchers’ minds.

Says Dr Wing Thye Woo of Brookings Institution, Washington DC: “If the Chinese economy is depicted as a speeding car, there are three classes of failures that could result in a car crash: hardware failure, software failure, and power supply failure.”

In a recent academic exploration titled ‘What are the High-Probability Challenges to Continued High Growth in China?’ Woo says that by ‘hardware failure’ he refers to the breakdown of an economic mechanism, “a development that is analogous to the collapse of the chassis of the car.”

The probable hardware failures, in his estimation, could be a banking crisis that dislocates production economy-wide, or a budget crisis that necessitates reductions in important infrastructure and social expenditure.

A software failure, on the other hand, refers to a flaw in governance that creates frequent widespread social disorders that disrupt production economy-wide and discourage private investment. “This situation is similar to a car crash that results from a fight among the people inside the speeding car,” says Woo.

The probable software failures could come about if the current high-growth strategy creates so much inequality and corruption and if the state is not able to meet the rising social expectations about governance issues.

The third contingency - a power supply failure - refers to a situation where the economy is unable to move forward because it has either hit a natural limit or an externally-imposed limit. To persist with the speeding car analogy, it is comparable to a situation where the car has run out of gas or has had its engine switched off by an outsider. This could come about if there is an environmental disaster, or a trade war that leads to a collapse in China’s exports, says Woo.

In Woo’s assessment, the highest probability event that could lead to a ‘hardware failure’ is a weakening of China’s fiscal position; the highest probability event that could bring about ‘software failure’ is social disorder; and the highest probability event that could trigger a ‘power supply failure’ is water shortage.

“And my ranking of the probability of these three specific negative events in descending order is social disorder caused by outmoded governance, water shortage as a result of inept environmental management, and fiscal crisis generated by the repeated recapitalisation of state banks and the rapid ageing of the population,” says Woo.

Woo remains cautiously optimistic that China will complete the overhaul of its economic system and usher in the “harmonious society” that its leaders promise. “I am optimistic because both the Chinese society and the government want the economy to continue its convergence to a modern private market economy,” he says.

But what tempers that optimism is the consideration that the new major reforms contemplated in China - such as the establishment of social safety nets - are “technically difficult to implement”, and have few, if any, successful precedents in the world to draw upon.

Additionally, says Woo, there’s the “possibility that the many potential losers from these major reforms could successfully organise (themselves) to resist meaningful implementation of the reforms.”