How Vulnerable is China’s Economy?

China’s prodigious economic growth has been a defining feature of the twenty-first century. Troubles inside one of the country’s (and the world’s) largest property developers, however, expose potentially serious weaknesses in the Chinese juggernaut. Last week, China Evergrande Group, a development conglomerate saddled with over $300 billion in debt, failed to make a $83 million repayment to investors. Global markets swooned in response. Some even predicted that China was approaching a “Lehman Brothers moment,” referencing the collapse of an investment bank that triggered the Great Recession. While Evergrande’s troubles are serious — the real estate industry comprises 29% of China’s economy — alarm over a systemic financial crisis is unfounded, according to most China analysts. Unlike Western governments, Beijing directly controls China’s largest lenders, the flow of capital in and out of the country, and all bankruptcy proceedings. It therefore enjoys immense leverage in deciding how to restructure Evergrande without risking mass panic. 

Nonetheless, Evergrande’s struggles expose other vulnerabilities in the Chinese economy. Evergrande is but one of many Chinese companies that have borrowed heedlessly in recent years to capitalize on a government-spending fueled housing bubble. This pits the government with a dilemma of rescuing companies like Evergrande and encouraging more incautious borrowing or letting them fail and risking disruption in economic sectors (like housing) important to China’s middle class. Corporate indebtedness is not the only challenge facing China’s economy. Comparably serious is the slackening of growth this year. Retail sales, industrial production, and property development have flagged all summer, causing Bank of America to downgrade its projections for China’s economic growth next year from 6.2 to 5.3 percent. It seems unlikely that Evergrande’s adversity will spark an economic collapse, or even a limited crisis. Yet the company’s woes combine with other worsening trends to foretell difficult days for China’s once irrepressible economic progress. 

Questions and Background

  • Would a serious economic downturn in China weaken the popular legitimacy of the Chinese Communist Party?
  • How are domestic economic challenges likely to influence China’s recent military build-up? Will its foreign policy become more assertive as challenges mount?
  • Are economic weaknesses likely to make Xi Jinping more or less cooperative in engaging the U.S. and Europe on areas of mutual interest like climate change and areas of disagreement like intellectual property protection? 

Five Lessons Evergrande Taught Us About the Chinese Economy
Greg Rosalsky and Darian Wood. National Public Radio. September 28, 2021. 

China is a Declining Power — and That’s the Problem
Hal Brands and Michael Beckley. Foreign Policy. September 24, 2021. 

Trading One Dependency for Another
Nadia Schadlow. War on the Rocks. May 12, 2021.

Strengthen Asia to Weaken Beijing
Walter Russell Mead. The Wall Street Journal. May 10, 2021. 

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