What If China’s Economy Stagnates? Economic Stagnation Scenarios Explored

Many investors are so accustomed to the idea that China’s economy has been “hot” (impressive YOY GDP growth rates, for example) for decades that they find the very idea that it might eventually stagnate apocalyptic.

Would scenarios involving economic stagnation be catastrophic for China?

Perhaps, but not necessarily.

To be more precise, it would be unwise to provide “set in stone” answers to such questions without at the very least asking the “elephant in the room” follow-up question: in the China-related scenario we are discussing, what happens to other nations?

In other words, of course it would be close to catastrophic if other nations keep chugging along but let’s say China’s real estate market implodes, bringing many sectors of the economy along for the ride to such a degree that the country ends up going from pre-2010 double-digit GDP growth, to today’s single-digit GDP growth rate status quo and then abruptly to stagnation… the trend is your friend, as the old trading adage goes, and if a trend would be painted in such a manner, let’s just say the situation would be quite problematic for China.

However, we need to understand that economic stagnation scenarios might actually represent a positive development for China given the right context.

Let’s assume the global economy would implode tomorrow, with negative GDP growth becoming the norm when it comes to the overwhelming majority of nations… except for China and perhaps a (select) few others, which don’t do very well either but at least their economies merely stagnate rather than experience a downward trajectory.

To put it differently, the equation needs to be analyzed from a comparative perspective.

Would the previously mentioned stagnation scenario represent a good thing for China, just because everyone else is worse off?

Not necessarily, because:

1. China’s population wouldn’t exactly be pleased, a situation which risks putting even the authority of the Communist Party of China under pressure… social unrest doesn’t exactly tend to manifest itself during times of prosperity. Furthermore, a valid case could be made that the survival of the status quo in a less authoritarian society (Western nations, for example) is more likely under more dire circumstances than in a country such as China
2. Unlike Western nations, while China does boast the world’s #2 GDP in nominal terms, it lags relatively far behind when it comes to per capita metrics, anything from the GDP per capita to humanitarian indicators such as life expectancy, infant mortality rates and so on. From a humanitarian perspective, GDP stagnation in China could have (much) more dire consequences than negative GDP growth in a more developed Western nation
3. When the situation looks grim, governments sometimes resort to desperate measures to “save face” and most of them revolve around identifying an enemy and channeling the frustration of the average citizen in that direction, with the US – China trade rhetoric being relevant in this respect, with the important mention that it has started during times of relative prosperity and, as such, doesn’t represent what one might call an apples to apples comparison

Now, of course, one can also relatively easily think of scenarios where China manages to turn this situation (its stagnating GDP in the context of negative GDP growth in the West) into something that works in its favor, especially if whichever calamity were to cause this takes place in the more distant future, with China having additional time to become more robust.

At the end of the day, there are quite a few variables which could end up determining how China would fare under scenarios which revolve around economic stagnation domestically correlated with negative GDP growth in the West:

1. The time dimension and as a general rule, the more time it takes until this hypothetical calamity takes place, the more time China has to become more robust from the perspective of the previously mentioned per capita indicators and the better it is likely to fare
2. How serious the problems of other nations may be and especially what the governments of the countries in question will end up doing about it (finding enemies to point to wouldn’t exactly be in China’s best interest in light of the fact that China represents the most obvious candidate for a wide range of reasons)
3. How the average Chinese citizen will react to the new stagnation framework and whether or not enough frustration will brew to potentially cause civil unrest

… the list could go on and on.

The bottom line is this: nobody can predict the future and those who claim otherwise are most likely charlatans with hidden agendas. Therefore, the goal of this article never revolved around even attempting to do that. Instead, the ChinaFund.com team simply wanted to make it clear that economic stagnation doesn’t necessarily have to be a death sentence for China. On the contrary, it might even prove to be something that works in China’s favor under the right circumstances.

We cannot stress this enough: those who see China as anything but the impressively complex equation it is will most likely choose strategies that are sub-optimal at best and a display of sheer ignorance at worst. As such, we would strongly suggest improving your overall understanding of China when it comes to anything from economics to culture or working with consultants who have done their homework and are willing to share their experience. Should you be interested in the latter, the ChinaFund.com team is only a message away and the most hassle-free way to reach us would be either using the Contact section of our website or sending us a direct email (contact@chinafund.com).