China’s rapid rise as a global economic powerhouse has been nothing short of remarkable. However, recent developments suggest that the country’s decline may be imminent. While prevailing theories attribute this decline to an overleveraged real estate sector and a lack of transition to a consumer-based economy, there is a bigger picture that needs to be considered.
According to the Cobb-Douglas Production function, economic output is derived from three inputs: labor, capital, and total factor productivity (TFP). TFP is crucial in differentiating countries and driving GDP growth. China’s ascent to becoming the world’s second-largest economy can be attributed to its abundant labor force and its ability to utilize labor and capital efficiently through technological innovation.
For centuries, China had the largest population in the world, providing it with a surplus of labor. The implementation of the one-child policy further bolstered its labor force by allowing women to enter the workforce. This surge in female participation in the labor force led to increased production and household income. Western societies also played a significant role by supplying billions of dollars in investor capital.
However, China’s success was largely built on imitation and intellectual property theft rather than technological advancements of its own. Many of China’s largest businesses, such as Tencent, Alibaba, Baidu, and Luckin Coffee, are knockoffs of innovations developed elsewhere. These businesses exist due to Western capital, protectionism by the Chinese Communist Party (CCP), and internet censorship that shields them from international competition.
Unfortunately, the same central planning policies that contributed to China’s success are now causing its downfall. The one-child policy, although officially abolished in 2016, has resulted in generational and cultural shifts. With millions fewer women of childbearing age each year and a fertility rate less than the replacement rate, China’s population has dropped below that of India. This decline not only threatens China’s position as a global producer but also as a global consumer.
Capital is also fleeing China, with foreign direct investment into the country collapsing by 82 percent to a 30-year low. Multinational companies and investors from around the world are switching their emerging markets exposure to exclude China, managing or eliminating the risk altogether. China’s aggressive intellectual property theft has become so bold that Western governments and companies are taking action to protect themselves.
The Biden administration, for example, is restricting advanced AI hardware exports to China. A diminished Chinese economy also means less leverage for demanding joint ventures or technical information from U.S. companies. This loss of technology to steal and the inability to replace stolen innovation on its own further contribute to China’s decline.
As foreign capital flees and countries and companies safeguard themselves from Chinese theft, the CCP tightens its grip on control, scaring off foreign investment even more. The Chinese view seems to be that more central planning is the solution to a failure of central planning. However, innovation cannot be forced, and dictating population growth or attempting to regulate prosperity is futile.
China’s rise as the second-largest economy is undoubtedly impressive, but the CCP’s control over the factors of production increases the risk of investment while sowing the seeds for economic decline. U.S. investors must be cautious and consider adjusting their portfolios to mitigate the risks associated with Chinese investments.
It is important to note that the views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times. However, they provide valuable insights into the potential challenges facing China’s economy and its impact on global markets.
In conclusion, China’s ascendancy laid the groundwork for its decline. The same macroeconomic factors that contributed to its rise, such as abundant labor and imitation-based growth, are now causing its downfall. As China faces challenges related to population decline, capital flight, and intellectual property theft, it is crucial for investors to reassess their exposure to Chinese investments and consider alternative strategies. The future of China’s economy remains uncertain, and it is essential to navigate these risks wisely.
