Variable 3: How is the economy of China doing?

Now, the Chinese economy has been on a tear for the last three decades. This graph cribbed from Wikipedia nicely shows this trend:

It was doing double-digit growth rates and is still growing 6-7% a year. As I point out in my previous blog posts, the Chinese armed forces are not really ready to invade a defended Taiwan, especially their air force and navy. This is going to take some time and money to build up. 

Such a build up sort of means that the economy needs to keep growing. Hard to justify lots of nice new shiny expensive high-tech airplanes when the economy is in the doldrums. As the economy has been steadily growing at 6% or more a year for 30+ years, their definition of doldrums may be pretty slanted. 

Now, relatively speaking, the Chinese have not been putting as much into defense as either Taiwan or the United States. Their defense budget is between 1.3% to 1.7% of their GDP. In contrast, the U.S. defense budget is between 3.4% to 3.7% of its GDP. Taiwan’s defense budget is around 2.3% of their GDP. As the Chinese economy grows, so to will their defense budget; I suspect we will know they are serious about changing the status of Taiwan if and when their defense budget expands to 2 or 3% of GDP.

But, the big question is whether the Chinese economy is actually going to keep expanding at 6% a year. A lot of people have been questioning that for a while, some people have been predicting that China is heading for an economic crash, some people have been claiming that the economy is artificially boosted, and other people are claiming that their economic statistics are artificially boosted. Regardless, they are facing a changing economic environment with India and other countries taking over the “cheap manufacturer” role. The transition to a more developed and growing economy could be a little fraught. 

There is one big ticking time-bomb the Chinese are facing, which is their demographics. I have blogged about this before (see below). The birth rate of China is below replacement rate, so the population is aging and the number of new young workers is declining. Old people are less productive and because of their health problems, sometimes more expensive. This is an economic drag with all aging populations unless one comes up with a Logan’s Run type solution. But, even a bigger problem will be the declining young work force. This is in part, a problem created by the one-child policy of China, which had good short-term benefits but has now created a long-term problem. Most likely the Chinese population will experience negative population growth by 2030. The population for China for 2021 is estimated at 1.44 billion. The United Nations predicts the Chinese population will be 1.36 billion by 2050. The real shortfall will be in the number of new workers.

Now, China is reacting to that with a new three-child policy. An article on that is below. China abandoned is one-child policy in 2015 (much too late in my opinion), went to a two-child policy and now have upgraded to a three-child policy. What is next: do they all become Mormons? This does look like an exercise in desperation. But, regardless of what the Chinese government does, I don’t think we are going to see a sudden sea-change in Chinese demographics over the next twenty years.

So, if the population starts declining by 2030…then does the economy decline with it? I think it will slow economic growth down. Hard to imagine they can maintain their 6% growth rates in that environment. They appear to have no quick and easy fix.

Now, a slow growth, stagnant or declining economy creates all kind of new problems. First, it is hard to increase or justify defense expenses when the economy is stagnant. If they are serious about creating the modern air forces and navy that they need to invade Taiwan, then they need to go on a spending spree for a decade or so. Chinese is looking at the population starting to decline by 2030. In 2020 they only had 12 million new births. By 2025 they will have over 300 million people over the age of 60. Does this mean that they have already “lost the bubble” for the chance to build up their military so as to take Taiwan?

Second, invading Taiwan is going to have a big negative economic impact. I have discussed this before, with perhaps a loss of 60-80% of their trade, 60% of their oil and a decline in their economy of 30-40% (just a guess). See the post below.

Third, stagnant or declining economies tend to lead to demands for political reform. This leads to either governmental reforms, leadership changes, civil unrest or even overthrow of the government. It was the extended period of economic stagnation that set the stage for the overthrow of Communism in Russia. We did go from a world in 1991 that had 16 Communist governments to a world with only four (China, Cuba, Vietnam and North Korea). Is this the final stage of that movement? One cannot rule it out. Hard to imagine the leadership of China is going to be focused on invading Taiwan if they are facing another Tiananmen Square (1989)

That said, there is a risk here in the danger to the government. Argentine invaded Falklands Island in part due to concerns about unrest in Argentina. In a sense, it was an invasion conducted for the sake of trying to bolster the government. This may not be a good example for China to follow, for not only did Argentina loose the war, but the government was overthrown and the leaders were arrested. The head of the Argentine junta was sentenced to a dozen years in jail. 

There is another example of a booming Asian economy that was going to surpass the United States. This is Japan. I have blogged about this before. To summarize: In 1995 the Japanese economy was 71% of the U.S. economy based upon GDP. In 2017 it was 25%.  I always liked this graph from that blog post:

Does history repeat itself?

 

 

Previous blog posts:

Invading Taiwan in the next six years – the fight? | Mystics & Statistics (dupuyinstitute.org)

Proposed Defense Budget for 2022 | Mystics & Statistics (dupuyinstitute.org)

Demographics of China | Mystics & Statistics (dupuyinstitute.org)

“We can’t afford it”: Chinese internet users have rejected Beijing’s new three-child policy

Where Did Japan Go? | Mystics & Statistics (dupuyinstitute.org)

 

P.S. Chinese economy grew 6.7% in 2018, 6.0% in 2019, 2.3% in 2020 and is projected to grow 8.5% in 2021 (source: World Bank and for 2021 IMF). In contrast, the U.S. economy grew 3.0% in 2018, 2.2% in 2019, -3.5% in 2020 (it shrunk), and is projected to grow 6.39% in 2021 (source IMF).

P.P.S.: A recent article on Chinese demographics that repeats what I have been saying: https://www.reuters.com/world/china/china-2020-census-shows-slowest-population-growth-since-1-child-policy-2021-05-11/

This entry was posted in China, National Security Policy, Net Assessment by Christopher A. Lawrence. Bookmark the permalink.

About Christopher A. Lawrence

Christopher A. Lawrence is a professional historian and military analyst. He is the Executive Director and President of The Dupuy Institute, an organization dedicated to scholarly research and objective analysis of historical data related to armed conflict and the resolution of armed conflict. The Dupuy Institute provides independent, historically-based analyses of lessons learned from modern military experience. ... Mr. Lawrence was the program manager for the Ardennes Campaign Simulation Data Base, the Kursk Data Base, the Modern Insurgency Spread Sheets and for a number of other smaller combat data bases. He has participated in casualty estimation studies (including estimates for Bosnia and Iraq) and studies of air campaign modeling, enemy prisoner of war capture rates, medium weight armor, urban warfare, situational awareness, counterinsurgency and other subjects for the U.S. Army, the Defense Department, the Joint Staff and the U.S. Air Force. He has also directed a number of studies related to the military impact of banning antipersonnel mines for the Joint Staff, Los Alamos National Laboratories and the Vietnam Veterans of American Foundation. ... His published works include papers and monographs for the Congressional Office of Technology Assessment and the Vietnam Veterans of American Foundation, in addition to over 40 articles written for limited-distribution newsletters and over 60 analytical reports prepared for the Defense Department. He is the author of Kursk: The Battle of Prokhorovka (Aberdeen Books, Sheridan, CO., 2015), America’s Modern Wars: Understanding Iraq, Afghanistan and Vietnam (Casemate Publishers, Philadelphia & Oxford, 2015), War by Numbers: Understanding Conventional Combat (Potomac Books, Lincoln, NE., 2017) , The Battle of Prokhorovka (Stackpole Books, Guilford, CT., 2019), The Battle for Kyiv (Frontline Books, Yorkshire, UK, 2023), Aces at Kursk (Air World, Yorkshire, UK, 2024), Hunting Falcon: The Story of WWI German Ace Hans-Joachim Buddecke (Air World, Yorkshire, UK, 2024) and The Siege of Mariupol (Frontline Books, Yorkshire, UK, 2024). ... Mr. Lawrence lives in northern Virginia, near Washington, D.C., with his wife and son.

10 thoughts on “Variable 3: How is the economy of China doing?

  1. While examining trends such as “the U.S. economy grew 3.0% in 2018, 2.2% in 2019, -3.5% in 2020 (it shrunk), and is projected to grow 6.39% in 2021 (source IMF)” for invasion-reasonableness prediction-purposes (or invasion-deterrence prediction-purposes in the case of USA and Taiwan), remember that a percentage increase after a previous year’s recession is reflecting a catch-up rather than an ongoing trend. Better to look at the percentage change between longer periods (for example, between decades) and even better to look at the GDP and GNP growth (in real terms, and even in military-purchasing-power terms) by longer period (e.g., by decade) since the length of time that it would take for PRC to have the wherewithal to invade Taiwan is what seems to be of interest to you.

      • What’s the assumed threshold for having the economic capacity to successfully invade Taiwan? How long is it expected to take in order to reach that threshold? The year-to-year growth in GDP or GNP isn’t as relevant as the distance (measured in time and money) from 2021 to the threshold-realization year. I wouldn’t be surprised to learn that the answer would support the prediction that PRC isn’t going to invade Taiwan in the near future (all else being equal, especially assuming a reasonably effective deterrence policy) no matter the income growth rates (unless some unbelievably huge rates are assumed).

  2. It all sound very plausible except for a wild card event such as a Hitler type appearing. I have just been re-reading Martin van Creveld’s book Supplying War and he makes a good case that the Third Reich was really not organised and ready to invade the Soviet Union, but it did, and failed only after doing a lot of damage. Non-economic (irrational?) issues such as assumed racial superiority, technological superiority and paranoia about a possible Soviet attack were contributing factors.

    I am also reminded that, to the best of my knowledge, no one predicted the Tiananmen Square massacre either. It too seemed to be provoked by a perceived threat to the ruling elite. This sort of irrational behaviour is entirely possible, hard or impossible to predict and would upset the careful calculations above. There could be a Pearl Harbour awakening if an attack is suddenly launched on Taiwan. In that case I really wonder whether anyone in the region would actually respond to defend Taiwan. That is the real question. Would anyone react militarily to defend Taiwan?

    • It all sound very plausible except for a wild card event such as a Hitler type appearing.

      No, you cannot rule out such an event. But, in the case of Hitler, you had the great recession and a fractured political system. Right now, those conditions do not exist in China.

      I am also reminded that, to the best of my knowledge, no one predicted the Tiananmen Square massacre either.

      At the time (1989), during the protests, a Chinese friend of mine told me that there was no way the current regime was going to let it continue and that it would be violently repressed.

      On the other hand, not a lot of people were predicting at late as 1987 that the Warsaw Pact would dissolve and Soviet Union would collapse (1991).

      That is the real question. Would anyone react militarily to defend Taiwan?

      I will get to that. It is variable #5: What is the degree of U.S. commitment to Taiwan?

    • Clinton, one should also consider the effect of spiritual warfare on the probability of an invasion of Taiwan by PRC. For example, in the case of the German decision to invade Russia that you mentioned, British newspapers reckoned that Adolf Hitler’s decision to invade Russia was an act of divine intervention that spelled the “doom of the Nazis” and referred to a pagan proverb: “Whom the gods would destroy, they first make mad.” [Rees Howells, Intercessor] Germany invaded Russia on June 22, seven weeks after Rees Howells prophesied a word from Yahweh: “There is one country more I want to bring judgement on, and that is Communist Russia.” Rees then prayed, “Lord, bring Russia into the war and deal with Communism.” Six weeks later, Russia entered the war against Germany. [My guess is that it would have taken more than six or seven weeks for Germany to have even inadequately prepared for invading Russia; so, Germany probably was already leaning in that direction. Any military historians have any knowledge about how rapid was the German shift toward invading Russia?] Once in the war, things were not going well for Russia, with the invading Germans almost at the gates of Moscow on the morning of October 19 when Rees heard the following from The Lord: “Is there any need for Moscow to fall? Why don’t you pray for me to save Moscow and give a setback to the Nazis?” Dr. Kenneth G. Symonds (Fellow of the Royal College of Surgeons, who also served on the staff of Rees’ Bible College of Wales) related the following about that morning’s message from Rees: “The director opened his message by saying that the first thing the Lord had told him that morning was, ‘Pray that Moscow will not fall.’ It seemed ridiculously impossible, for we had heard that its fall was inevitable. But although the prayer was so far beyond us, . . . the Spirit laid it on us. It seemed that He prayed in spite of us, so we travailed all day until late in the meeting that night when He so inspired us through his servant that we had the assurance that God was answering. The Lord gave liberty to pray that the Nazis might be utterly overthrown in a Russian winter. We shall never forget the joy of victory He gave us as faith mounted up during those days.” Four days later, Rees prophesied: “Thus saith the Lord, ‘He [Hitler] is wintering in the Russian snows.'” “The Germans should have taken Moscow those days virtually without a struggle . . . . Why they turned back is a mystery only the Germans themselves can solve for history.” [I Chose Freedom, by Victor Kravchenko] Any historians with insights about that mystery?

      As agreed by Chris, you can’t rule out twists and turns in decisions by PRC.

      Youth With A Mission (YWAM), as well as various ministries and churches within Russia and other parts of Europe, predicted the dissolving of the Warsaw Pact and the collapsing of the Soviet Union (and interceded in prayer for such developments).

      Spiritual warfare could introduce one of those wild cards in the case of PRC versus Taiwan.

  3. “The population for China for 2021 is estimated at 1.44 million. The United Nations predicts the Chinese population will be 1.36 million by 2050.”

    Small typo – should be “billion?”

Leave a Reply

Your email address will not be published. Required fields are marked *