China’s Communists are back in style, at least in international financial centers.

Foreign investors, who once called China “uninvestable,” are now pouring into the country’s equity markets. According to the Institute of International Finance, offshore inflows into Chinese equities in the January-October period was up 443.9% compared to the same period last year.

Observers, however, are not sure that’s a good idea. “Many investors have bought whole hog” into the narrative that “nothing will hinder the global ascendency of China,” writes Rana Foroohar of the Financial Times. Investors, she notes, believe Beijing has already won the trade war with President Trump and is poised to dominate chips and AI. China, the thinking goes, is sure to be the new global hegemon.

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Even Foroohar, once a China bull, does not now share the optimistic line. The fundamental nature of the regime, she argues, makes China ill-prepared to lead the world.

Foroohar’s right. Look closer, and the bullish narrative appears faulty.

For one thing, the Chinese economy is flatlining. Underlying indicators suggest official gross domestic product figures are exaggerated.

China’s President Xi Jinping is pushing an exhausted economic model to the breaking point.  (Oliver Bunic/Bloomberg via Getty Images)

More fundamentally, Xi Jinping is pushing an exhausted economic model to the breaking point. For instance, decades of crazy over-investment in property produced a bubble. According to He Keng, a former senior statistics official, China has enough vacant housing for the entire population of 1.4 billion. That extreme oversupply cannot be deflated without either a crash or, worse, a decade or more of Japanese-style stagnation.

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Xi also presided over the massive overbuilding of infrastructure, especially the high-speed rail network. Chinese rail technology is magnificent, but the system loses buckets of money, something that would be evident if China State Railway Group Co. properly accounted for capital costs and debt-servicing.

Xi, however, is not changing course. At the Communist Party’s Fourth Plenum last month, he revealed the 15th Five-Year Plan, which covers the half-decade beginning next year. The blueprint contemplates “high-quality development” through advanced technology.

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China, as a result, is developing the world’s most efficient manufacturing — the country’s “dark factories” are so automated that there are no lights on assembly lines because no humans are needed— and is flooding the world with its products.

“What makes China unique is not the technology but the political environment accelerating its deployment,” writes Desmond Shum, author of Red Roulette, on X. “In democracies, automation is slowed by elections, unions, NGOs, and courts. China has none of these shock absorbers. When the state pushes, the system moves.”

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China’s Communist Party has created an “engineering state.” Its leaders, says Dan Wang, author of Breakneck: China’s Quest to Engineer the Future, “treat society as a big engineering project, where people are yet another building material that the leadership just want to tweak and destroy if necessary.”

China’s “building material”—its people—are now extremely unhappy. This decade, gloom has descended over Chinese society, something evident during the strict COVID-lockdowns and especially after the failure of the economy to snap back after the pandemic.

The pervasive pessimism has resulted in people “lying flat” or “retiring,” various ways of opting out of society. And people are either delaying or refusing to have children. This trend, in combination with other factors, will result in China losing three-quarters or more of its population this century.

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No wonder, China’s intellectuals and social media users refer to this moment as their country’s “garbage time of history.”

In the meantime, Xi Jinping is not responding to the unhappiness in society other than by initiating a censorship campaign against “excessively pessimistic sentiment.” Most significantly, he is not willing to implement structural changes to put more money in the hands of the laobaixing, the common folk.

Consumption now contributes about 38% of the country’s GDP, one of the lowest rates in the world. Given Xi’s pro-industrial policies, that rate will fall even further.

Xi is confident of his grip, although few economists, analysts, or observers think his export-dependent plans are sustainable. The world’s markets are not big enough to absorb China’s factory production.

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Talk about short-term thinking. “We have been evangelized for decades to think that China is a culture of strategy, that it always adopts the long, patient view,” Blaine Holt, a retired U.S. Air Force general and now China watcher, told me. “The Communist Party today is hanging on by a thread and wondering how it will navigate the rest of November rather than the rest of this century. Long-term now means months not decades.”

China’s President Xi Jinping talks after joining a group photo during the G20 Summit in Rio de Janeiro, Monday, Nov. 18, 2024. (AP Photo/Eraldo Peres)  (AP Photo/Eraldo Peres)

“It’s a powerful manufacturing machine sitting on top of a brittle socioeconomic structure,” writes Shum, referring to China. “A combustible combination—and not an environment foreign capital is eager to underwrite.”

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For the moment, foreign capital is eager, but China has punished investors before. 

Foreigners will almost certainly lose money again, given the unstable nature of the economy and society.

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