May 30, 2026:
Inefficient investment distribution within China's economy is having an adverse impact on growth and transformation. Excessive amounts of corporate debt impede investment in more efficient sectors of the economy, creating economic unpredictability. The government, in the form of the CCP/Chinese Communist Party, presides over the economy and is responsible for what works and much more that doesn’t.
Another economic problem is the SOEs/State-Owned Enterprises that overwhelm essential portions of the economy. This frequently results in misallocation of capital and diminished competitiveness. The ongoing real estate disaster has siphoned funds away from more promising things like technology and manufacturing. More than a hundred billion dollars was lost during the 2020 Chinese real estate bubble. Then there is the MSS/Ministry of State Security, which has its own list of investment needs. This includes internet security and hacking foreign networks. The MSS hackers also seek valuable IP/Intellectual Property, so they turn these breakthroughs into Chinese accomplishments.
Since the 1980s, China has invested 40 percent of its GDP each year, largely through SOEs and local governments. By the early 21st century those investments produced ten percent annual growth. In subsequent decades that declined to four percent and will continue to decline through the end of this decade.
In a Western, free market economy such a situation would be resolved by the banks carrying those bad loans shutting them down and at least trying to make subsequent investments more prudent and productive.
In a country like China, where the government with its SOEs and many officials meddling in economic affairs, temporary fiscal emergencies are now allowed. Bad investments will continue, building millions of housing units in places no one wants to live. The roads and bridges built to reach the unwanted housing are little used.
Side effects of this mismanagement include Chinese households that are among the most indebted worldwide when measured by per capita GDP in the world relative to their incomes. Another looming disaster is more Chinese workers retiring while cash available to provide old age benefits shrinks. One reason for this is that many SOEs and non-government corporations have amassed too much debt at the expense of their suppliers.
By combining private and public debt, China is already far more indebted than the Americans and appears unable to escape a growing mass of non-producing investments. This Chinese financial mess also shows up in their equities markets. The Shanghai stock index is still below where it was nearly twenty years ago and delivers trivial returns compared to the American markets.
Meanwhile the Americans invest only 17 percent of their GDP each year to achieve up to 2.5 percent growth. American stock markets are rising while the country attracts investments worldwide. Unlike the Chinese CCP intervention in economic affairs, the American free-enterprise system has developed methods to efficiently allocate capital because the state doesn't meddle excessively. America has a massive advantage with GDP per capita seven times higher than China's and consumption per capita twelve times higher.
No matter how you calculate it, American consumption per capita remains seven times higher than in China. This will never get better for China because their birth rate is below the replacement level. The American population continues to grow because of a higher birth rate and a growing immigrant population.
Militarily China is in a bad position with too few young men and women willing to join. Those that do serve are untried and the CCP worries that using their military against the experienced Americans would be a disaster. The one potential war, over Chinese efforts to incorporate Taiwan as another Chinese province, is doomed to failure for military and economic factors. The Taiwanese military is built on the American model using combat tested weapons and tactics. Worse, any Chinese effort to take Taiwan by force would risk an economic catastrophe. American nuclear subs can plant mines outside major Chinese ports, halting trade. That is catastrophic for the world’s second largest exporter. It would also be destabilizing for the world economy. But the rest of the world has greater resources and rapid recovery skills. Everyone would suffer, but China would suffer the most and require more time to recover. During that period many Chinese export customers would find permanent replacements for Chinese products. Chinese economists keep the CCP updated on this problem and the reality of a Chinese economic catastrophe because of a Taiwan invasion attempt. Taiwan and the Americans watch, wait and continue to upgrade Taiwanese defenses.