At Bloomberg Tyler Cowen summarizes China’s conundrum in a few paragraphs:
…might there be a chance that China can avoid an economic crackup altogether?
China has several factors going for it here, including increases in labor productivity, productivity-enhancing migration of labor to cities and technology transfers from abroad. A fourth set of factors, which have operated in the past but not so much now, are liberalizations and improvements in government policy. Even when Chinese businesses get into trouble, and might otherwise go bust or be forced to lay off workers, these broad rising tides often have come to the rescue.
So if you think China can reach the proverbial soft landing, your basic take should be that government-run fiscal policy will keep matters afloat long enough for underlying pro-growth forces to validate once more most of China’s struggling investments and debt burdens.
If you are more pessimistic, your core scenario might run like this: Most Chinese have not yet lived through a true economic crash, and policy makers seem to have an increasing focus on the short term and maintaining political power. Given that dynamic, each time China postpones a major recession it encourages more debt and a greater overextension of investment. That requires stronger underlying positive forces to come to the rescue each time, whereas productivity improvements and urbanization probably are slowing down, although Chinese data as usual do not yield definitive answers.
I’m more concerned about how the Chinese people and authorities will respond when the inevitable “crackup” happens. Will they accept it as just something else that must be endured? Will they blame each other? Or will they blame external enemies? China has an enormous capacity to create mischief and the Chinese authorities could potentially try to deflect blame from themselves and onto some external enemy, e.g. Japan, India, Russia, or us. Not a great time to be one of China’s neighbors.
All that cutlass rattling over the South China Sea will come in handy when the golden BB hits. Though looking over the editorials and columns at Xinhua, a purge of unusual size would hit the CPC. As they say, interesting times.