By IMD Professor Winter Nie and James Wang
These days, we read a lot of things about China. In a recent op-ed piece that appeared in the Wall Street Journal
on March 6 titled “The Coming Chinese Crackup
,” one of the leading sinologists in the US and a well-regarded China-hand, David Shambaugh of George Washington University, made the claim that “The endgame of Chinese Communist rule has now begun”.
“Its demise is likely to be protracted, messy and violent,” he stated and then went on to speculate that Chinese strongman leader Xi Jinping could be deposed of in a coup d’etat.
Professor Shambaugh’s warning words were read with great interest by many because he is a reputable scholar and his past writings have often been considered supportive of the scenario of China’s rise. In support of his conclusions, Shambaugh cited five “telling indications” of what he considered “the regime’s vulnerability and the party’s systemic weaknesses”. In summary, these are: A large number of rich Chinese have already left or are in the process of leaving the country; A noticeable pickup in the suppression of political dissent and tighter control of social media; Even loyalists do not bother to fake interest in party-line propaganda; Corruption is so pervasive throughout the society that it cannot be eliminated by any campaign; and that the economy is “stuck in a series of systemic traps from which there is no easy exit”.
Predicting the demise of authoritarian regimes, particularly one of China’s size and complexity, can be a hazardous undertaking. A ready example that comes to mind was China during the middle decades of the 19th century. Ruled by a Manchurian (a small ethnic minority) court, the Qing dynasty suffered humiliating defeats at the hands of the British and other Western powers in what became known as the Opium Wars. In the meantime, a monumental wave of peasant-led uprisings overran virtually all the grain-producing southern provinces. The imminent collapse of the Qing dynasty, then led by an illiterate dowager, would seem to be a foregone conclusion. And yet, the dynasty would hold on to its “heavenly mandate” for another fifty years!
Observers of a similar set of facts can sometimes derive diametrically opposing conclusions. Predicting China’s future, a favorite pastime for some, has not traditionally produced high success rates.
As Shambaugh generated debate and even bewilderment among those who follow China affairs closely, another development began to dominate the headlines in the international press. It started when the United Kingdom, a staunch ally of the US, announced its decision to join the Asian Infrastructure Investment Bank (AIIB) despite the not-so-subtle disapproval of the US government. Born of strategic as well as practical calculations by China, AIIB would be the first multilateral financial institution of significance not dominated by the West. By the end of March, a total of 57 countries signed up as charter members of the AIIB, including the five leading emerging economies (the so-called BRICS), all the ASEAN nations, four of the G7 (with the US, Japan and Canada holding off for the time being), and key US allies in the Pacific region such as Australia and South Korea.
To some, the AIIB signified the “coming of age” of China as a responsible stakeholder in the world order. Economics Nobel laureate Joseph E. Stiglitz, a former chairman of the Council of Economic Advisors, wrote “we should welcome China's initiative to multilateralize the flow of funds. Indeed, it replicates American policy in the period following World War II”. The former Secretary of the Treasury Larry Summers went so far as to state that: “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system”.
So, which is it? A China that is on track for a protracted, messy and violent demise, or a China that is ready to grab a seat at the head table of the post-war international hierarchy, presumably at the expense of the reigning powers.
What is the upshot of this litany of negativities? Has China already entered the early stages of a pending implosion? Or is it, as the hedge fund manager James Chanos predicted back in 2010, that the Chinese real-estate bubble is “Dubai times one thousand… or worse” and the nation’s economy is “on a treadmill to hell?”
The late MIT macroeconomist Paul Samuelson once quipped that “Wall Street Indexes predicted nine out of the last five recessions”. In the same vein, we might add that political commentators and hedgies and many other individuals of sound mind have, over the years, collectively, predicted a dozen of the last zero collapses of China.
Winter Nie is a Professor of Operations and Service Management at IMD. She teaches in IMD’s Orchestrating Winning Performance (OWP) program which runs from June 21-26, 2015.
James Wang is Associate Professor of Finance at City University Hong Kong