(Jan 31): In 2001, Gordon Chang published a contender for the least prescient China book ever. In The Coming Collapse of China (Random House, 2001), Chang, an American lawyer, made the case that the combination of an authoritarian political system, creaking state-owned industrial firms, and intense global competition — a consequence of China’s entry to the World Trade Organization — would deal a death blow to the economy.

“Will some economist from Beijing University,” Chang wondered, “explain trade deficits and the concept of comparative advantage to an angry mob as it marches on the Communist leaders compound of Zhongnanhai?”

Of course, it’s the reverse that happened. Since 2001, China’s economy has grown from US$1.3 trillion to US$18.3 trillion (RM81.3 trillion) — overtaking first France and the UK, then Germany, and finally Japan to claim the number two spot in the world economic rankings. Exports have boomed, geopolitical heft has increased, and it’s not Beijing but Washington, DC that faces the angry mob demanding an explanation for jobs lost to trade.

Not to be outdone in the fine art of leaving hostages to fortune, I titled my book China: The Bubble That Never Pops. Since it was published in 2020, China’s growth has slumped, the real estate market has gone from boom to bust, a crackdown on entrepreneurs has hammered confidence, export controls from the US have blocked access to crucial technologies, and anyone betting on China’s continued outperformance has lost a lot of money.

All of which raises the question, have I knocked Chang into second place in contention for the little-coveted least-prescient-China-book award? Perhaps unsurprisingly, I’m going to make the case that the answer is ‘no’ — for two reasons.

First, and at the risk of appearing pedantic, a bubble bursting is a sudden, extreme and uncontrolled shock. Think of the sub-prime mortgage crisis in the US in 2008, the Asian Financial Crisis of 1997, or the bursting of Japan’s real estate bubble in 1992. Those were moments when — in varying combinations — policymakers lost control, financial markets crashed, gross domestic product (GDP) plummeted, and unemployment soared. That is not what is happening in China.

Let’s focus on real estate — once the biggest driver of China’s growth, and now the biggest drag. It’s certainly true that China’s policymakers allowed supply to run far ahead of demand and that correcting the imbalance is a painful process. Major property developers have gone belly up, investors have taken a bath, and households have seen the value of their biggest asset eroded.

At the same time, painful though it is, it is also true that the slow-motion collapse of China’s real estate sector is manageable and contained. To see why, consider the contrast with the US sub-prime mortgage crisis. In the US, policymakers ignored excess leverage in the property sector until it was too late. When homeowners started to default on their mortgages, the resulting financial crisis tipped not just the US but the world into recession.

In China, policymakers acted before a crisis erupted, deploying an array of tools to manage the pace of decline. Well-funded banks have been able to take the strain from rising bad loans. And while growth has certainly taken a hit, the economy is not in recession and spillovers to the rest of the world have been limited.

In the US, in other words, the bubble popped. In China, the air is coming out of the bubble faster than I thought it would, but it’s still a managed deflation.

Better news: Short-term pain holds out the promise of long-term gain. Borrowing ever-larger amounts of money to build ever-more empty apartments was never a development strategy that could be sustained for very long. By making it less profitable — or indeed unprofitable — to speculate on real estate, China’s policymakers are driving workers and investors away from building ghost towns and into more productive employment.

That dynamic — taking a hit today in order to secure growth tomorrow — illustrates my second point: China’s economic development is still on track. Let’s think about two of the major initiatives from Beijing in the period since 2020: the crackdown on giant tech firms, and the swing against financiers.

Beijing’s turn against tech firms has played out in the Western media as a disastrous misstep. Deng Xiaoping, the story goes, had read the memo on the importance of entrepreneurs — and so China thrived. President Xi Jinping, the story continues, doesn’t get it. His sweeping assault on market darlings like Alibaba, Tencent and Didi has cratered share prices, dented incentives to invest, and undermined China’s growth prospects.

Well, maybe — but there’s also another way of thinking about it. China had a problem with tech monopolies. Alibaba was already the dominant player in e-commerce and one of two major players in e-payments. The initial public offering (IPO) of Ant, Alibaba’s financial arm, aimed at making them a force in banking as well.

Monopolies can be bad news — milking customers, gouging suppliers, and squeezing out start-ups. Recognising that, China’s leaders took steps to reign them in. Those steps — including the market-spooking cancellation of Ant’s IPO — were admittedly maladroit. Still, they showed a willingness to tackle powerful vested interests to deliver for the economy as a whole.

Investors who were betting on getting a share of those monopoly rents lost their shirt. The Nasdaq Golden Dragon Index is down almost 70% from its peak. For the broader economy, though, checking monopoly power is a positive for development.

Then there’s the crackdown on the financial sector. Pay for bankers has been capped at US$400,000 a year. Bonuses have been clawed back. The Central Commission for Discipline Inspection — China’s anti-corruption investigators — have taken aim at some of the biggest names in the market.

In the US, that would be a disaster. The US economy operates at the frontier of technology. Growth comes from innovation that pushes that frontier back, and innovative firms require a sophisticated network of venture capitalists, investment bankers and portfolio managers to take risks and channel capital to where it needs to go. Having some of the smartest minds focus on finance is a positive.

In China, that’s not the case. Average incomes about a third of the level in the US show the economy is still far from the bleeding edge. That means development is driven more by catching up on existing technologies than inventing new ones. At China’s current level of development, a no-frills financial system can do the job of channeling funds to priority projects. Math whizzes that could craft complex derivative trades are better employed accelerating China’s artificial intelligence (AI) sector.

Execution has been far from perfect. As with the real estate controls and crackdown on technology entrepreneurs, though, there’s a logic to China’s approach, and a willingness to take short-term pain to support longer-term development prospects. The view on Wall Street is that because investors have lost money, the China miracle is over. The view in Zhongnanhai is that it’s precisely to sustain the miracle that those losses were required.

Even as the slow-motion collapse in real estate dents short-term growth, and market sentiment remains near rock bottom, there are signs that Beijing’s strategy is starting to pay off. China’s electric vehicles are selling around the world. DeepSeek has catapulted China into peer competition with the US on AI. The balance of China’s economy is shifting rapidly. In 2020, when Xi started to deflate the real estate bubble, property accounted for 24% of GDP and high-tech sectors for 11%. In 2024, property had fallen to 19% while high-tech had grown to 15%. By 2026, China’s economy will very likely be fuelled more by silicon than cement — an important step forward.

Did China: The Bubble That Never Pops get everything right? Absolutely not. The air has come out of the bubble faster than I thought it would — partly because of the Covid shock. Investors have taken a much bigger hit than I imagined. The second Trump presidency adds risk abroad. Authoritarian overreach does the same within China. A Chinese economy that appeared on track to rapidly outstrip the US as the world’s biggest now appears set to stay in second place for the foreseeable future.

But has The Coming Collapse of China finally arrived? Also no. The Chinese economy is evolving, not collapsing. In the race to write the least-prescient-China-book, I am also stuck in second place.

Tom Orlik is the chief economist of Bloomberg Economics, and the author of Understanding China’s Economic Indicators and China: The Bubble That Never Pops.

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