In 2020 author Thomas Orlik, the chief economist for Bloomberg Economics, published a book titled, “China: The Bubble That Never Pops.”
Then came COVID-19. Two tumultuous years later, Orlik has prepared a second edition of his book, including the performance of China’s economy during the Covid pandemic, risks from the real estate crisis, President Xi Jinping’s Common Prosperity agenda, and what it all means for the U.S.-China economic race.
He discussed his book during a July 21 conference sponsored by the Center for Strategic and International Studies.
Orlik said when he published the book, he set out a pretty straightforward thesis.
“China’s economy and financial system, I argued, is more resilient than critics in the West give them credit for," he said. "And China’s economic and financial policymakers are more innovative, more ingenious, better at solving problems than critics here in Washington, D.C., or on Wall Street give them credit for.
"In the last two years, of course, a huge amount has happened. COVID has hit China and hit the world," he added. "The common prosperity agenda has changed China's corporate landscape. A real estate crisis threatens to tip China into potentially a financial crisis.”
After two years of the pandemic, he is taking a fresh look at China.
“On public health China has really performed extremely well during the COVID stress test," Orlik said. "Very few deaths in China, certainly very few deaths compared to the large numbers which we suffered here in the United States and in other major economies and growth."
On growth China looks less stellar, but compared to major economy peers, some are doing better, some worse, in his view.
“We really can’t talk about winners, but China has lost less than most other major economies,” Orlik said.
He sounded a cautionary note about Chinese President Xi Jinping, who appears ready to defy the two-term limit other recent leaders have observed.
“He appears very likely to stay on for a third term," Orlik said. "And, after that, who knows, maybe a fourth term. Maybe he’ll stay in power for quite a long time in the future. And that raises a concern because when we look around the world, countries where there’s a single-party state and the leader has stayed in power for a very long time — think about China under Chairman Mao, think about Russia under Vladimir Putin — what we tend to see is a deterioration in the standard of governance.”
Orlik said financial analysts also are sounding the alarm about the ratio of outstanding borrowing for the economy as a whole to GDP.
“And that ratio, of course, has rocketed up from 2008 when it was about 140% to about 300% today,” he said. “And when we look around the world and we scan the history books, when we see countries which have this kind of debt to GDP profile, we very often see those countries encountering a financial crisis.”
He said, however, that there are no indications of a systemic financial crisis.
“Why is that? Well, the reason today is that the financial crises do not start because banks have made too many loans or banks have too many bad loans,” Orlik said. “Financial crises start because banks run out of funding. Lehman Brothers didn’t collapse because they had too much exposure to subprime mortgages. Lehman Brothers collapsed because they could no longer finance their activities by borrowing in the money market.
“And in China, because China is a nation of savers and because China’s capital account makes it hard for their savings to go overseas, funding for the banking system remains very, very stable and secure,” he said.
Orlik said the COVID-19 pandemic tested countries’ diplomatic ties, good or bad, or their relations with the rest of the world. A Pew study asked a very simple question: Do you have a favorable or unfavorable view of China?
“And what the results are telling us is that over the course of the COVID pandemic, unfavorable views of China, not just in the United States, but also in Europe and in big Asian neighbors like Japan and Korea have shot up,” he said. “And that's partly because of the blame game over the origins of the COVID-19 crisis. Partly because people don’t like what they see in Hong Kong and in Xinjiang. And for China, it’s a problem. It’s a problem because China is a big exporter. And when your economy is partly driven by sales to foreign countries, it’s good to retain positive relations with those foreign countries.
“And it’s also a problem because China is a net taker, a net beneficiary of technology flows,” Orlik added. “China part a big part of China’s growth has been powered by absorbing foreign technologies, absorbing technologies from foreign firms, absorbing technologies from foreign universities, and then putting them to work in the Chinese system.”
He said there remain many unanswered questions, but sees no need for panic or grave concern.
“I still don’t think China faces a systemic financial crisis. The bubble that never pops still is not going to pop,” Orlik said. “I do think it’s quite plausible, though, that China will come out of this current crisis on a lower growth path. That means the point where they overtake the United States will be later in the 2030, and perhaps China will never decisively accelerate away from the United States.”