Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Is China unraveling?

Should you invest in the world's fastest growing economy? Analysts say yes, but there are ominous generational signs of financial and social instability in China. (10-Sep-03)
Summary China's overheated economy is in a credit bubble that could pop tomorrow, next month, next year, or five years from now. With the entire social structure being changed by recent migrations of millions of rural peasants to the cities in search of high-paying jobs, the stage is set for a new secular Chinese rebellion.

China's economy has been growing at an incredible average 9.4% per year since 1979. Today, China's economy is the fastest growing economy in the world, and with American, European and Japanese economies in the doldrums, analysts are calling China "the new economic engine of the world," and are encouraging investments in China.


But when you examine China's history, and view today's events on a historical scale, it seems more likely that China's economy is in a credit bubble much like Japan's in the 1980s and America's in the 1990s. Both of these last two bubbles resulted in severe stock market collapses.

The signs of strain are everywhere. Industrial output is skyrocketing, straining railroads and electrical power generation. Credit defaults are skyrocketing, especially for car loans.

In ordinary times, such strains might simply be a sign of impending inflation, but when you look at China's history, it looks more like China is quickly entering a generational crisis period.

China's is one of the oldest civilizations on earth, but its history is strewn with massive internal rebellions, such as the White Lotus Rebellion (1796-1805) and the Taiping Rebellion (1852-1869), often killing millions or even tens of millions of people. The most recent was the Chinese civil war that began with Mao Zedong's (Mao Tse-tung's) Long March in 1934. At the end, Mao's Great Leap Forward of 1959 alone killed tens of millions of people through executions and starvation.

You don't have to be a rocket scientist to realize that China may be just about due for another massive secular civil war. Generational Dynamics predicts such a civil war will occur when the generation of people with personal memories of the last civil war retire or die. In other words, it could happen any time within the next 5-15 years.

History also shows that the time leading up to such a crisis period is characterized by an unraveling of the agreements and compromises that ended the last crisis period, with any resulting problems papered over with a credit bubble that makes money plentiful. This happened in America in the 1850s, 1920s, and 1990s, for example. When the bubble bursts, the crisis period begins, and the crisis war or internal rebellion begins shortly thereafter. China appears to be in such a financial unraveling period today.

Even more ominous is that Mao's entire social structure appears to be unraveling as well.

Mao's brand of Communism involved organizing and controlling the hundreds of millions of peasants who worked in the fields and produced food. After the disastrous Great Leap Forward, peasants were allowed to grow their own food and be self-sufficient again, without government intervention, but were forbidden to leave their farms to move to urban areas.

That's the social agreement that's unraveling today, with startling results. Individual peasant farms are being taken over by large farming businesses in China, just as family-owned farms in America were taken over by large farming businesses earlier in the century. This means that China's 900 million peasants are seeing their livelihoods disappear.

Income disparities are huge. The World Bank reports that the economic output of financial capital in Shanghai exceeded 40,000 yuan ($8,500) per person last year, while families in some remote areas make only 600 yuan per year.

The result is that millions of rural peasants are migrating to the cities in search of high-paying jobs. This represents a collapse of Mao's restrictions on peasant migration, and is a significant change in China's social structure.

When will China's credit bubble collapse? We can be sure that a collapse is coming, but we don't know whether it will be next month, next year, or in five years. When it comes, the masses of peasants now migrating to cities will be without jobs, causing social instability, the perfect breeding ground for the spread of a rebellion led by followers of Falun Gong.

This is certainly not a far-fetched speculation. Leaders of the Falun Gong movement have described their movement as a modern day Taiping Rebellion, and protests and demonstrations by followers of Falun Gong in April 2000 were so huge that a frightened Beijing Communist Party has brutally repressed it, declaring it an illegal religious cult. History shows that this kind of repression will work only until the next generational change takes place.

So, for those thinking about taking analysts' advice to invest in China, caution is in order. If you're brilliant enough, or psychic enough, to extract your money just before the bubble bursts, then you'll do quite well. Otherwise, you may lose everything.

Perhaps all this might simply work itself out at some other time, but at this time, with a generational change causing China to enter a crisis period, Generational Dynamics tells us that a new Chinese rebellion is probably not too far off.

Copyright © 2002-2016 by John J. Xenakis.