Could China Fail?


This is perhaps the broadest but at the same time most difficult question that even die-hard China bulls are most likely plagued by… whether they are willing to admit it is an entirely different discussion. The bottom line is that at least in the back of your mind, no matter how optimistic you are or claim to be when it comes to China’s bright future, it is perfectly natural for doubt to creep in.

Not only is it perfectly natural, we strongly believe it is downright important.

To clarify, we want to make it perfectly clear that we did not launch because we believe those who gain exposure to Chinese assets will lose money. On the contrary, we expect the exact opposite to be true and believe that in the long run, career-defining opportunities (still) await. However, we just as strongly believe that allowing yourself to be blinded by your bias would represent a potentially portfolio-breaking mistake.

As such, questioning your core belief(s) is paramount.

Do we think China will “fail” or, in other words, that the process started by Deng Xiaoping with his Four Modernizations and continued by his successors will not only be halted but downright reversed?

No, we don’t think something of that nature will happen (with “will” being the operative word) because if we did, let’s just say we wouldn’t be here in the first place. To put it differently, we believe that such scenarios are not necessarily impossible but… well, improbable.

Had someone asked us if we thought China “could” fail, our answer would be affirmative for the simple reason that there is a probability greater than zero that China might indeed fail. A probability we consider to be very low but, nonetheless, it is greater than zero. As a word of advice, we would strongly recommend staying (far) away from experts who flamboyantly throw around terms such as “0% chance” or “guaranteed” for the simple reason that embracing such attitudes represents a pretty close to surefire path toward losing money.

Moving back to the topic at hand, it is important to also clarify what we mean by “fail” when it comes to China.

In a nutshell, we are referring to broad scenarios which revolve around China’s economic growth story no longer being able to continue and, on the contrary, for major setbacks to gradually emerge which ultimately lead to China making steps backwards. Our team cannot stress this enough: no matter how optimistic you are, the exercise of at the very least giving some thought to these scenarios is of vital importance.

Let us use our imagination.

We will imagine that not very far into the future, a global financial calamity more devastating than the 1929 Great Depression will emerge, a calamity for which China is not yet ready. As mentioned in previous articles, the market still perceives China as a “risk-on” destination toward which they flock when times are good but when things head south, they are just as quick to rush toward the proverbial exists.

For the sake of our little thought experiment, we will assume this is exactly what happens and that as usual, investors seek safe haven assets such as US Treasuries and abandon pretty much everything else… including, yes, China. All of a sudden, China finds itself in the peculiar position of realizing investors no longer consider it a worthwhile destination, with it sitting on amazing infrastructure which ends up being sup-optimally used.

The more time passes, the more frustrated China’s population as well as the Communist Party of China become. Make no mistake, the practice of finding scapegoats is most definitely not a “Western-only” habit, with the Chinese authorities as well as population most likely being more than eager to find someone to blame for the economic problems that have ensued. And just like China tends to be the usual suspect when the West is looking for someone to blame for economic issues, the reverse will likely be valid in our situation, with the Chinese authorities as well as general population becoming increasingly frustrated with the West.

For reasons which range from ideological (with the Communist Party of China not exactly being a major supporter of the West for obvious reasons) to pragmatic (shifting the blame so as to direct popular frustration toward an external adversary rather than risk dealing with domestic civil unrest), it would probably be only a matter of time until extreme protectionist measures would be embraced, measures which would go against pretty much everything Deng Xiaoping had envisioned. The implications of that should be more than obvious.

Again: do we consider such scenarios likely?


Do we consider them probable?


Do we consider them possible?


The bottom line is this: as can be seen, it isn’t actually that difficult to envision scenarios in which, indeed, major setbacks would be possible when it comes to China. How you protect yourself against such developments is entirely up to you, depending on which probability your model assesses when it comes to one scenario or another. Needless to say, spending vast resources and debilitating amounts of time preparing for ultra-low-probability events isn’t exactly the wisest of approaches: “dosage” and “context” are the operative words.

Should you or your organization be in need of assistance when it comes to putting together a long-term plan that yes, even accounts for ultra-low-probability events, the team of experts if at your disposal. We firmly believe in finding the right balance between calculated optimism and preparing for the unexpected and are eager to share our expertise with clients who understand how vital it is to embark on their China-oriented journey via a robust strategy. To find out what we can do for you, visit our Consulting section and to get in touch right away by sending us a message with what you have in mind, our Contact page is at your disposal.

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