There’s a renewed interest in Chinese investments among foreign investors, especially in international financial hubs. Once deemed “uninvestable,” China’s stock market has seen a staggering increase in offshore investments—up nearly 444% from January to October compared to last year, according to the Institute of International Finance.
However, this trend has sparked skepticism. Rana Foroohar from the Financial Times notes that many investors have bought into the narrative that China’s global dominance is inevitable. There’s a belief that Beijing has already triumphed in the trade war with President Trump and is now set to lead in technology sectors like artificial intelligence and semiconductors. It seems that a lot of investors are convinced that China will be the next global superpower.
Curiously enough, even Foroohar, who was once optimistic about China’s prospects, has adopted a more cautious stance. She posits that the inherent flaws in the system indicate that China isn’t truly ready to lead on the world stage.
When we take a closer look, the optimistic outlook seems rather shaky. The Chinese economy appears to be stagnating, with key indicators suggesting that the official GDP figures might be inflated.
Moreover, Xi Jinping is pushing an outdated economic model to its limits. Years of excessive investment in real estate have created a significant oversupply, with a senior statistician estimating that there are enough empty homes for China’s entire population of 1.4 billion. Addressing this surplus could mean facing a collapse or a prolonged period of stagnation akin to Japan’s economic woes from decades ago.
Additionally, there has been reckless overconstruction in infrastructure, notably in the high-speed rail sector. While China’s rail technology is impressive, it loses considerable money—something that would be apparent if the accounting practices of the China National Railway Group were transparent.
Still, Xi hasn’t altered his approach. Recently, during the Communist Party’s fourth plenary session, he revealed a new five-year plan focusing on “high-quality development” that incorporates advanced technologies.
China has indeed established a highly efficient manufacturing sector, characterized by fully automated “dark factories” where human labor is no longer necessary. They’re flooding the global market with products.
Desmond Shum, author of “Red Roulette,” points out that what sets China apart isn’t necessarily its technology but the political environment that accelerates its growth. Unlike democracies, where progress is often hindered by a multitude of checks like elections and labor unions, China’s state control streamlines its development.
However, this so-called “engineering state,” as described by Dan Wang in “Breakneck: China’s Quest to Engineer the Future,” treats people as mere resources, easily manipulated or discarded. Currently, those “building materials”—the citizens—are expressing discontent. A mood of pessimism has prevailed over the last decade, particularly following the strict COVID-19 lockdowns and the sluggish economic recovery.
Many people are opting out of societal norms, engaging in phenomena like “lying flat” or “retiring” prematurely, and there’s a noticeable decline in birth rates. If trends continue, China may face a significant population drop this century.
It’s no wonder that many Chinese intellectuals and social media users are referring to this era as their nation’s “trash hour of history.” Meanwhile, Xi Jinping’s response has largely been to censor negative sentiments without considering necessary reforms that would benefit average citizens.
Currently, consumption plays a meager role in China’s GDP—about 38%, one of the lowest globally—which could further decline given Xi’s industry-centric policies.
While Xi exudes confidence in his governance, many economists doubt the long-term viability of a strategy centered on exports, especially when the global market can’t absorb all that production.
This raises concerns about short-sightedness. Blaine Holt, a retired U.S. Air Force general and China expert, notes that the current Communist Party seems to be focused on the immediate future rather than decades ahead; for them, long-term planning has turned into a matter of months, not years.
“China is a powerful manufacturing machine sitting on a weak socio-economic structure,” Shum asserts. This dangerous mix may deter foreign investments.
While there’s enthusiasm among foreign investors right now, history shows that China can be unkind to them. Given the current instability, it’s likely that these investors could face losses again.
