Why China Might Be in for a Different Kind of Crash

Why China Might Be in for a Different Kind of Crash

Why you should care

Because the world’s most populous country could be in for a major economic and political shake-up.

Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.

We’ve all seen the blur of headlines: China’s stock market falls. Really falls — like it was the great Wall Street crash of 1929 all over again, only over there. And then the Chinese government puts the brakes on its financial system for a while and things feel better. Then the fretting continues this week over yet another epic fall. But there is one news flash, one alert in our smartphone that we’re not getting about any of this.

“Revolution in China! Revolution in China!”

OK, we’re not saying the world’s biggest communist country is under any imminent threat of change at the moment. But talk to Patrick Chovanec for a bit and he gets you thinking. As an adjunct professor at Columbia University’s School of International and Public Affairs who specializes in China, and chief strategist at Silvercrest Asset Management, Chovanec makes some interesting points about the two key pillars that have given China such power over its people. The first, which really came about after the 1989 Tiananmen Square protests, is “economic performance,” Chovanec says. “You don’t get a say in how you are governed but your lives are better, so just be happy,” is how it is best summed up. The second is nationalism, which Chovanec describes as a desire by the communist rulers to present China as a strong country — the opposite of how it was before the 1949 revolution.

If the economy truly falters, which is possible, then it’s clear the risk of revolution among its 1.3 billion people rises.

Of course, other examples from around the world show that revolutions are hard to predict. Who, for instance, could have guessed the Arab Spring would engulf parts of the Middle East and North Africa several years ago after the price of bread spiked? There had been, after all, many years of mass unemployment and harsh rule across the region. Similarly, in China, the uprising of 1989 was kindled by economic problems, most notably inflation. That quickly sparked political protests.

So far, China hasn’t seen a riot-fueled repeat of anything on that same level, although it’s common knowledge that major protests do occur across the vast country on a regular basis. If the economy truly falters, which is possible, then it’s clear the risk of revolution among its 1.3 billion people rises. The key issue, Chovanec notes, is that the weaker China’s economy becomes, the more willing it makes its rulers to take a gamble on another approach — nationalism.

Already, we’ve seen China flexing its muscles in what looks like a show of territorial ambition. Gordon Chang, author of the book The Coming Collapse of China, points to an incident last year when Chinese troops advanced into disputed territory on the border with India in the Himalayas. It was particularly bad timing as Chinese leader Xi Jinping was meeting with India’s elected leader, Narendra Modi. And despite orders from Xi that his troops retreat, it seemed that the Chinese military actually added force, indicating that Xi may not have total control over the military, says Chang. China has also been rattling its nationalistic saber at its neighbors, including Vietnam, Japan and the Philippines, where there are ongoing disputes.

But in such international adventures plans often don’t work out as instigators would like. Take, for instance, Argentina, which after years of awful economic problems invaded Britain’s Falkland Islands in 1982. It’s fair to say that the military junta likely never expected a vigorous response from a country half a world away. Nevertheless, that’s exactly what happened, and the Argentines lost the gamble.

As it turns out, that’s very much the calculation China is making, says Chovanec. “Great when it works and very problematic when you cross the red line.”

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