There is a demographic bomb which cuts in several directions. The country is undergoing a 19th century transition from farm to town while it confronts a self-induced shortage of women. The leaders of the country are confronted with the imperative to produce tens of millions of jobs a year or face increasing civil unrest.
A second anomaly is the general dissatisfaction across the vast country with the corruption and inefficiencies of the economic system leading to riots somewhere in China virtually 24/7. The leadership of a top-down economy must either loosen its grip and risk having these uprisings grow out of control or tighten its grip and risk shutting down entrepreneurship, innovation, capital formation, and the growth which it desperately needs.
A third anomaly is the corruption which is not just throughout the economy but represents the way of life. The central government finds that it cannot properly control its provincial party functionaries and bankers whose interests are often at variance with the central planners. Therefore, like our soldiers in Vietnam who lied to Secretary of Defense McNamara about body counts, the provinces lie to Beijing sending reports up the chain which will keep Beijing off their backs. Therefore, there is no real transparency and nobody knows truly what the numbers are even if they wanted to make them known.
A fourth anomaly is the fact that China has traded its environment for economic growth in a desperate attempt to keep pace with its demographic bomb. The ability to exploit the environment for growth is coming rapidly to an end and with it one can expect an end to rapid growth.
China must ultimately convert from a mercantilist export economy to an economy more oriented toward consumption and therefore self-sustaining. The problem is that if central planners make one misstep the whole process comes apart.
For example, if central planners do not tighten enough the inflation rate in China will run away. If they tighten too much, it crashes. They must do this in the absence of transparency so it becomes doubly difficult to centrally plan. They must do this while risking the deflation of the real estate bubble which, when it occurs not if, will be absolutely devastating. They must do this in the face of varying demands, undoubtedly shrinking demand, from their markets in America and Europe. Europe is disintegrating and Germany, according to Goldman Sachs, just went into recession. China faces the problem of shrinking markets as it tries to transition to a self-sustaining economy.
International competition is also cutting in Chinese manufacturing domain.
There are many more problems such as dishonest books in provincial banks and a series bogus accounting principles done by the central planners to take nonproducing loans off the books. These shenanigans must ultimately have their day of reckoning.
It is absolutely foolish to project a straight line growth in the Chinese economy. One can only think of the analogy of the manufacture of a pencil to show the folly of top-down planning for a controlled economy. Virtually anyone of these anomalies or some other black swan event could send China into a vortex.
That is not to say that China will not be a superpower, it already is, and it is not to deny that its trajectory is up while ours is down. It is say that only a fool projects straight lines.
