For most of the 20th century, China was a disaster zone as it was carved up by Western imperialists, ravaged by Japanese invaders and smashed by genocidal dictator Chairman Mao.
Former Communist revolutionary Deng Xiaoping, paramount leader of the People’s Republic of China between 1978 and 1989, laid the groundwork for the country’s dazzling recovery.
Deng realised that China had to ditch rigid communist doctrine and embrace capitalist chaos, famously claiming “it doesn’t matter what colour the cat is, so long as it catches mice”.
And it worked, with China posting double-digit economic growth for year after year, something Western countries could only dream of.
China started the millennium as the world’s second biggest economy and today they’re neck and next at around $27trillion. However, the US is growing faster.
The financial crisis hit the West hard, but it hit China even harder as its economic miracle turned out to be built on rampant debt and an out-of-control property market.
Instead of reining things in, authoritarian Chinese leader Xi Jinping has pump out more and more stimulus to less and less effect.
Super-strict Covid lockdowns crushed the economy, while the collapse of property giant Evergrande Group, which went into liquidation last week owing $300billion (£240billion), is only the beginning.
Birth rates are plunging, one in three young people don’t have a job, and the nation is struggling with the “three Ds” of debt, deflation and demographics.
Together, they spell trouble.
China still has 1.409billion people but in 2022 the population dropped by 850,000, the first recorded fall since the mass deaths of Mao’s punitive famines.
Last year, it fell by another 2.75million. The process is only going to accelerate as analysts forecast that China is set to “grow old before it grows rich”.
Nobody believes offical forecasts that the economy will grow by five percent this year.
China is now in a “deflationary spiral”, says Giorgio Broggi, quantitative analyst at Moneyfarm, and this may “lead to reduced production, wage decreases and increased unemployment”.
He said the property crisis has now spread to the banking sector, “causing further insolvencies and widespread protests”.
US companies are pulling out, claiming the country is “uninvestable”, amid rampant copyright theft and political harassment.
Unfortunately, in an interconnected world, the West cannot separate itself from China, even if it wanted to.
We are hooked on the country’s cheap exports, such as electronics, machinery, furniture, toys, clothing and cheap electric vehicles.
The container ships keep coming, which means we are importing a big problem.
As the Chinese economy slides, the country will try to compensate for falling domestic demand by dumping excess capacity on the West.
We’re about to be flooded with cheap stuff, in other words. And we’re probably going to love it at first. It could drive inflation down, and in short order.
Basically, China is exporting its deflation to us.
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This could play out in two ways. As inflation remains stubbornly high, most of us would welcome a sharp drop in prices, whatever the reason.
This would put money in our pockets and allow central bankers like the US Federal Reserve and Bank of England to slash interest rates, to get the economy moving again.
Estimates suggest inflation could fall to just one percent by the end of the year, and possibly lower. Who doesn’t want that? Apart from savers of course.
The danger is that it goes too far. Nobody wants deflation, which happens when prices start falling instead of rising.
While that sounds attractive, it means that people stop buying stuff today knowing it will be cheaper tomorrow, hitting profits, jobs and incomes. It ends in a nasty spiral.
Another worry is that the only way Jinping can unite a restless nation is by invading Taiwan and triggering war with the West.
That won’t be nice.
Some may welcome the decline of China. They should be careful what they wish for.
This is the Year of the Dragon, according to China’s lunar calendar, and we all risk getting burned.
