Past is not prologue

I have been more confident and less concerned than others about China's rise over the past thirty years.  Yes, they are far richer than they were and they are the second largest economy in the world.  And that is good.  We want all the world to be more prosperous; for people to have more choices; for people to be more free.  

But of course the Chinese people aren't free and under existing conditions unlikely to be so in the near future.  And the reasons why relate to six key challenges.

Socialism with Chinese Characteristics, launched by Deng Xiaopeng, has an inherent challenge.  The longer it is not resolved, the more dangerous it becomes.  A free competitive market delivers increasing prosperity and efficiency.  However, to do so, it needs a free flow of information, particularly when it comes to activities which affect prices.  China's Socialism with Chinese Characteristics sought to achieve some of the prosperity and efficiency of an open market place without relaxing controls on the political side of the equation.  In the long run, the more competitive the economy becomes, the more complex, the more it depends on free and open exchange of information but free and open exchange of information is anathema to political control.  This paradox is still unresolved.  China will likely face either declining economic efficiency (if political control is emphasized) or increasing political competition with the Chinese Communist Party if economic efficiency is emphasized.  Or both.  There are potential rough waters ahead owing to hard choices by those in power.

Military spending has risen dramatically over three decades of increasing economic prosperity and rising industrial complexity and technological sophistication.  Ground forces, the air force and the navy have all been upgraded and will continue to be upgraded.  Billions are being sunk into the creation of a Blue Water Navy with the intent of expanding China's force projection.  

In several countries, military spending and wartime emergencies have been a catalyst to technological innovations which ultimately trickle as a productivity multiplier into the civilian economy.  That is innovation at the knowledge frontier and it is not characteristic of China's spending.  China is largely seeking to deploy already established technology.  

For a good while yet, China will not be getting much bang for its military buck.  To play in the big leagues requires not only the volume of equipment but the sophistication of the equipment.  Complex weapon platforms such as air defense systems, aircraft carriers, and advanced fighters and bombers don't just represent dollars and units.  They are effectively complex eco-systems of knowledge, training, financing, logistics, culture, maintenance, etc.  All the pieces have to seamlessly function together.  If you just buy an aircraft carrier, you don't effectively have anything at all until all the other pieces come together.  China is making progress on the funding and the units but is still very much in the early stages of building the support structures for complex systems.  And it is spending a lot of money in the meantime.   

Demographics is easy to both exaggerate and underemphasize.  I think the challenges are still not fully appreciated outside of China.  An aging and shrinking population is not necessarily the kiss of death.  The cautionary example is Japan which has both an aging and shrinking population since 2008 but has still maintained an acceptable level of economic growth.  But Japan is culturally homogenous and already long prosperous.  They have a lot of cultural, financial, and technological capital to draw on.  

China is not there yet.  Its population is rapidly aging but not yet shrinking.  Between the combined effects of the old and now abandoned one-child policy with the recent move into cities in the past three decades, the Chinese labor force is guaranteed to get smaller, more expensive, less productive and less reliable.  These are not good trends in a country trying to get rich before it gets old.  

There will also inevitably be some social, class, and regional tensions that go along with this aging.  I understand that there are still some 4-600 million people still living in the countryside but I also understand that it has been demographically stripped, with the young disappearing into cities which are a demographic sink holes.  The cities are aging and the countryside is already grey.  Further, while the Chinese have been admirable savers over the thirty year boom, there are troubles on that front (see below) which will be compounded if they manifest in old age.  

Construction and misallocated capital is a larger issue likely to get larger.  We are seeing it right now with the residential home and apartment building crisis but I suspect it extends into multiple sectors.  And misallocation of capital at a national level can directly affect individual savings.  Chinese data and statistics are so murky and prone to manipulation that things might be much better or much worse than they appear but I have an abiding concern that they are worse.  Empty cities, empty apartment buildings, unused rail lines and highways, dramatically underused industrial capacity - I suspect in some or all these areas we are going to discover deep issues of misallocated capital.

If your economy is growing by 10% a year, it is easy to cover that misallocation as just one of the inherent risks of breakneck growth.  If you grow at 5% it becomes more painful.  If growth drops to 1-3% it really becomes concerning.  

Belt and Road Program.  This is a special aspect of misallocation of capital.  China has sunk more than a trillion dollars into its global Belt and Road Program.  This has been in pursuit of diplomatic objectives, in support of its Blue Water Naval aspirations, and as part of a longer term commitment to access to international resources.  From an engineering perspective some of the accomplishments are truly impressive and from a diplomatic perspective some of them are concerning in their possible effectiveness (at least in the near term).  But in terms of actual financial viability and long term operational effectiveness, many of the projects have a lot of question marks attached to them.  Will China see a real return on its financial and diplomatic investments?  To be seen.  But the financial costs are not trivial.

Food.  In the end, there is always food.  The most fundamental of Maslow's hierarchy of needs.  At 1.4 billion, there are a lot of mouths to feed.  There is the same amount of cultivatable land.  Soil quality has been perhaps eroded though industrialization.  Protein has largely come from pork which has proven to be vulnerable to diseases requiring drastic and repeated culling.  There is dramatic opportunity for improved agricultural production through applied technology but this has been counterbalanced by the dramatic changes in the rural agricultural population.  The young population has drained into the cities leaving an older and less adaptable farming population.  Can China feed itself into the future?  Certainly yes.  To a degree.  Can it feed itself in a fashion to which it has become accustomed or would want?  That answer cannot be answered as confidently.

For a great power, these six issues are more than passing threats and constraints.  I think they significantly constrain the options and choices of the Chinese CCP and of the Chinese people.  China has achieved a startling and masterful outcome with their thirty years of rapid growth and sociological modernization.

But I worry that they are pushing at those above constraints.  Any one of them could engender massive setbacks in any five year window and were there to be degradations in more than one of those six risk factors?  Then we are talking about bad scenarios.