China’s economy is spiraling: Will war be Xi’s distraction?

On Monday, China announced that its economy grew 6.3 percent in the second quarter compared to the same period last year. The Chinese economy, despite the robust-looking figure, is in the early stages of failure. In a failing China, the Communist Party’s leadership will undoubtedly fall back on nationalism — and could end up starting a war.

China’s 6.3 percent report missed expectations by a wide margin, and analysts are now talking about how the Chinese economy is slowing fast.

China’s current economic woes are not cyclical. Beijing overstimulated its economy to get past the 2008 downturn. Yes, Chinese leaders created growth then, but they made the country overly dependent on government spending, building too many apartment blocks and high-speed rail lines. And they incurred too much debt. China’s total-country-debt-to-GDP ratio, after taking into account the so-called “hidden debt,” many say, is about 300 percent.

Everyone says China must now rely on consumer spending, but China’s economy is geared toward depressing consumer sentiment. For instance, deposit interest rates at banks have been kept artificially low to support the state’s lending for white elephant projects that now scar the country.

Moreover, the nationwide “hukou system” of household registration also inhibits consumer spending. This system prevents rural Chinese from obtaining residency in urban areas, where they have migrated to provide labor, so they are not entitled to social services.

“The whole Chinese economy is built on cities getting free labor from the countryside — no costs for schooling, medicine, pension,” Anne Stevenson-Yang of J Capital Research told me. “Without ending the hukou system, consumption can never become an economic driver.”

China has, therefore, probably reached the limits of its potential. A fundamental change to the structure of the economy would, as a practical matter, require a fundamental change to the political system. The Communist Party, however, will most likely do nothing to jeopardize its position. It will defend the institutions that benefit from the rules depressing consumer spending because those institutions keep it in power.

“Chance of structural reform?” Stevenson-Yang asked. “None.”

Why should anyone outside China care about its intractable economic problems? Because those problems make the country unstable and aggressive.

How so? We start with unemployment in the urban 16-24 age cohort, which hit a record 21.3 percent last month. Many young Chinese, as a result, have given up. They are now “lying flat,” opting out of society, but they also took to the streets late last year in nationwide demonstrations. It is the young, after all, that have led revolutions, in China and elsewhere.

Moreover, many of China’s people are giving up on their country, as the unprecedented surge of Chinese migrants at America’s southern border indicates. U.S. Customs and Border Protection reports that the number of migrants from China increased by more than 1,000 percent in the first five months of this federal fiscal year compared to the same period in the preceding fiscal year. Those Chinese who can’t leave are desperate.

China is coming apart at the seams, so President Xi Jinping, with few economic solutions to adopt, will eventually come to the realization he has only two choices. He can let economic forces take their course and bring down the Chinese political system, which has depended on delivering prosperity as the primary basis of its legitimacy, or he can whip up xenophobia and nationalism by triggering a conflict with the United States or other victims.

Even now, Xi can’t stop talking about war, turning to the subject at every opportunity. At the annual meeting of the National People’s Congress in March, for instance, he repeated his now-favorite slogan: “Dare to fight.”

Xi’s message has quickly filtered down through the ranks. In the following month, the Eastern Theater Command of the People’s Liberation Army, after completing provocative air and sea exercises around Taiwan, announced it was “ready to fight.”

And to drive home the point, this month Xi, dressed in military green, visited the Eastern Theater Command and gave another one of his rousing let’s-go-out-and-kill speeches.

This is more than just rhetoric. China’s leader is engaging in a total-society mobilization for war. A conflict is something he has long been planning for.

“Xi Jinping’s domestic policies have been designed to bring all economic forces under his all-embracing direction, and now he stands alone,” Charles Burton of the Ottawa-based Macdonald-Laurier Institute said to me this week. “He is seen inside the country as fully responsible for economic and other problems. His sole recourse is to start an international crisis to rally China’s population behind him.”

Many think war is inconceivable. Soon, Xi Jinping will have even more internal reasons to launch one, however. The problems building up inside China are too great.

Gordon G. Chang is the author of “The Coming Collapse of China.” Follow him on Twitter @GordonGChang.