A comprehensive look at the situation in China paints a picture of a nation in decline. What follows is a situational assessment designed to inform strategic planning for business and government leaders interested in comprehending what may come next.

First a note on predictions: I’ve spent a career looking for the best models to predict what comes next. None of them work. All of them have flaws. Consider, for example, the easy to use linear projections. They work by assuming things will keep going along the current trajectory. If it is raining outside now, it probably will be raining outside 5 minutes from now.

The problem with linear models is they never predict surprise. When they fail they fail totally.

Another other lesson I have learned from decades of experience on China in particular: No one understands what is going on there well enough to predict what the CCP leadership will do. The greatest China experts I know, including practitioners, academics, authors and analysts, are quick to highlight that they can inform, but no one should take any assessment on what comes next in China as a certainty. When you hear certain predictions, understand you are listening to a very arrogant person who may be smart but will likely be wrong.

With the above in mind, the best path for informing strategic planning with views on China is not to make predictions, but to build scenarios of multiple alternate futures. The art of scenario planning is critically important here.

What follows is a situational assessment designed to inform scenario planning on what will come next in a declining China and what it means for business and government decision-makers in the West.

Overview: The economic environment in China is challenging. From the perspective of the Chinese citizen, declining home values are reducing personal wealth, banking troubles are limiting access to credit, flood damage is straining household finances, and employment issues are making job security uncertain. Additionally, the aging population is increasing the dependency ratio and straining public services, while the social credit system adds uncertainties related to personal freedoms and economic opportunities. Out of touch company, government and CCP leadership exacerbates these issues, contributing to a sense of disconnect and frustration among the populace. Furthermore, growing military expenses are diverting resources from essential public services, adding to the economic strain. The rise of automation is polarizing the job market, while dependency on foreign investment and markets is creating vulnerabilities due to geopolitical tensions.

Some challenges our analysts have been reporting on in OODA Daily Pulse reporting:

1. Home Values: The Chinese housing market has been under significant pressure recently. Property values have stagnated or even declined in some areas due to oversupply, particularly in smaller cities. Major developers like Evergrande have faced liquidity crises, exacerbating the downturn. This has affected household wealth, as real estate is a major component of personal assets in China. Many homeowners are seeing their property investments lose value, impacting their financial stability and consumer confidence.

2. Banking Troubles: China’s banking sector has been grappling with a rising number of non-performing loans, largely due to defaults in the real estate sector and from businesses impacted by the economic slowdown. Small and regional banks, in particular, are facing significant stress, leading to tighter credit conditions for consumers and businesses. There have been instances of bank runs and protests by depositors, highlighting the fragility of confidence in the banking system.

3. Flood Damage: Recent severe flooding in several provinces has caused extensive damage to infrastructure, homes, and agricultural land. This has led to significant economic losses, particularly in rural areas where agriculture is a primary source of income. The floods have disrupted supply chains, increased living costs, and strained local government resources. Recovery efforts are ongoing, but the immediate impact has been a reduction in disposable income for affected families and increased expenditure on repairs and replacements.

4. Employment Issues: China’s job market has faced challenges with a slowing economy and structural shifts. The tech sector, once a major growth driver, has seen layoffs amid regulatory crackdowns and market uncertainties. The manufacturing sector, traditionally a major employer, is also struggling with weak global demand and trade tensions. Youth unemployment has become a significant concern, with many recent graduates finding it difficult to secure jobs. Meanwhile, people over 32 are increasingly being told they are too old to be hired. The government is attempting to address these issues through various stimulus measures and employment programs, but challenges remain significant​​.

5. Demographic Shifts (Aging Population): China is experiencing significant demographic shifts, with an aging population presenting major economic and social challenges. The working-age population is shrinking, putting pressure on the labor market and increasing the dependency ratio. This shift is straining public pension systems and healthcare services, and is likely to lead to slower economic growth. The government is exploring policies to encourage higher birth rates and extend retirement ages to mitigate these effects.

6. Social Credit Scores: The social credit system in China, which monitors and rates citizens’ behavior, has broad implications for economic and social life. While intended to enhance trust and compliance, it raises concerns about privacy, social mobility, and personal freedom. Negative scores can restrict access to services, credit, and even employment opportunities, thereby impacting economic stability and individual livelihoods. This system adds another layer of uncertainty for many citizens already navigating economic hardships​.

7. Out of Touch Leadership: There is growing sentiment among Chinese citizens that the leadership is increasingly out of touch with the everyday challenges faced by the populace. Policies that favor state-owned enterprises and large corporations often leave small businesses and individuals struggling. The centralized approach to decision-making can sometimes lead to slow responses to local issues, further alienating the public. This disconnect can exacerbate economic disparities and contribute to social unrest​.

8. Military Expenses: China’s military expansion, including a larger navy and airforce, has resulted in increased defense spending. The costs associated with maintaining and operating these forces, particularly as they extend their reach further from Chinese shores, are significant. This includes the construction of new ships, aircraft, and bases, as well as the logistical support needed for operations. These expenses are straining the national budget and diverting resources from other critical areas such as social services and infrastructure development​.

9. Rise of Automation and Technology Impact: The rise of automation and advanced technologies is reshaping the Chinese economy. While these technologies can enhance productivity and growth, they also lead to job displacement in traditional sectors. Many low-skilled workers are finding it difficult to transition to new roles that require higher technical skills. This technological shift is creating a polarized job market, where high-skilled workers benefit from new opportunities while low-skilled workers face increasing job insecurity​.

10. Dependency on Foreign Investment: China’s economic growth has been significantly fueled by foreign investment. However, recent geopolitical tensions and domestic policy shifts have led to a decline in foreign direct investment. Multinational companies are reconsidering their supply chains and investments due to uncertainties in the regulatory environment and concerns over intellectual property rights. This reduction in foreign investment is impacting the growth prospects of various sectors, particularly high-tech and manufacturing.

11. Dependency on Foreign Markets: China’s economy is highly dependent on foreign markets, particularly for exports. However, recent political tensions and trade disputes with key partners like the United States and European Union have strained these relationships. Retaliatory tariffs and sanctions have impacted Chinese exports, leading to slower growth in the manufacturing sector. Additionally, diplomatic conflicts with neighboring countries over territorial issues have further complicated trade relations, posing risks to economic stability​​.

12. Changing Views in the West: American business and political leaders who have been justifying and rationalizing trade with China are losing influence as Americans realize the truth. China has a history of stealing from everyone, breaking 100% of international agreements they signed, wiping out entire ethnic groups like Tibetans and (now Uyghurs) and imprisoning people who aren’t a threat but refuse to join the CCP  (like the entire high tech community and Christians).  Many are recognizing China to be a far worse threat than Iran or Russia as an anti-American, anti-civilization force.

Future Implications

• Cyber Conflict: As noted above I make few predictions. But every once in a while I see something so clear I just know it will come to pass. The economic pressures and need for technological advancement in the PRC will almost certainly lead to an increase in cyber crime originating from China. As the government seeks to leverage cyber capabilities, the line between state-sponsored activities and criminal enterprises will continue to blur, increasing cyber threats globally.
• Regional Hostility: We also need to watch for most regional hostility. China’s assertive policies, coupled with increased military capabilities, are likely to result in more frequent confrontations with neighboring countries, particularly in disputed areas like the South China Sea.

Actions To Consider

• Scenario Planning: As mentioned above, no one really knows what will come next, especially with a great power in decline. Companies and government agencies should not plan for a single scenario. In a coming post we will provide a template for scenario planning for a declining PRC designed to inform your internal actions.
• Track The Emerging Situation: Stay informed by ensuring you are on distribution for the OODA Daily Pulse. Consider sharing our content with others on your team and encourage others to subscribe to our content or apply to become OODA network members.