In the News

Seeing through China's Economic Mirage

by Rep. French Hill
Washington Examiner
December 19, 2023

In the summer of 1986, I joined a group of U.S. businesspeople sponsored by the Atlantic Council to attend a meeting of NATO nations in Mainz, West Germany . While in the country, we passed through the infamous Checkpoint Charlie from bustling, glamorous West Berlin through the treacherous Berlin Wall and into East Berlin. The transition was as stark as the opening scene in The Wizard of Oz , in which Dorothy emerges from her tornado-ravaged house into the technicolor Land of Oz. East Berlin was gray and desolate, with no products on its store shelves and its buildings still pockmarked from World War II damage.

Just two years after my trip, in 1988, the CIA estimated that the GDP of East Germany was likely to be higher than that of the West. Yet my own eyes showed me that such a statement was preposterous. Just a year later, in the fall of 1989, the Berlin Wall was breached, and four decades of communism in Central and Eastern Europe collapsed.

In the three decades since, this contrast between the view of bureaucracy in Washington and the reality on the street has stayed with me.

Daniel Patrick Moynihan of New York, a longtime senator and former United Nations ambassador, also frequently questioned the limits and failings of our government’s foresight. In his exceptional Harvard commencement address in June 2002, Moynihan told the graduates, “The hard fact is that American intelligence had not the least anticipated the implosion of the Soviet Union." Moynihan cited former CIA Director Stansfield Turner’s 1991 article in Foreign Affairs in which he lamented, "We should not gloss over the enormity of this failure to forecast the magnitude of the Soviet crisis. The corporate view missed by a mile."

It is for this reason that, as a member of the House Permanent Select Committee on Intelligence, I recently convened a panel discussion at the Center for Strategic and International Studies on the economic outlook for China and the reliability thereof. Our hourlong discussion included the views of Jude Blanchette of CSIS and Logan Wright of the Rhodium Group. Both are experts on the Chinese economy and have lived and worked in China.

Just like in the Cold War, it is essential for the United States to grasp the strengths and weaknesses of its rivals accurately if it is to plan and implement an effective response to their threats. Too frequently, with limited resources and the extraordinary quantity of global strategic threats, our intelligence community is principally focused on assessing the military capabilities and intentions of powers such as China, but it doesn’t spend enough time asking: Is Beijing’s economy strong enough to afford its military buildup? How severe is China’s economic slowdown, and does it affect Beijing’s long-term ambitions?

While it’s true that China’s economy remains formidable, it is also experiencing a dramatic contraction, driven by mismanagement and inefficacies. China’s financial system has served as a shock absorber for its political system over the past decade, extending new credit to bad investments to maintain employment and economic growth. However, that cannot continue indefinitely. Having a good understanding of the Chinese Communist Party’s increasingly constrained financial capacity to meet growing domestic challenges and expanded global ambitions is essential to U.S. and allied policymakers.

Chinese Communist Party leader Xi Jinping has simply stopped reporting abysmal youth unemployment statistics and continues to obfuscate or falsify other key economic indicators. This is not uncommon in dictatorships. The University of Chicago’s Luis Martinez suggests that authoritarian dictatorships overestimate their GDP by 35%.

China's economic headwinds have certainly received significant media reporting: write-offs in ill-conceived and failed loans to Global South nations as a part of the Belt and Road predatory loan scheme; the overinvestment in real estate that is burdening the local governments and banking sector with tremendous bad credit; the demographic collapse of young men for the workforce and military; the growing numbers of disappearing entrepreneurs; the growing trend of global competition to “derisk” the supply chain; and global backlash to the CCP’s political and economic choking of Hong Kong.

We cannot afford to repeat our past failure in estimating the weaknesses of the Soviet Union in the 1970s and '80s. That’s why it's important that our private sector economic forecasters and those employed in our intelligence community heighten their analysis of China, its prospects, and whether it can fund and sustain its extravagant ambitions.