š¢ The elephants in the room for China's future
I've been reading a lot about China lately. Having worked there for more than a decadeāteaching MBA classes to young Chinese business leaders while consulting for European firms in the marketāI wouldnāt claim to be a fully-fledged expert, but Iām far from naive.
For over a decade, Iāve warned about China's rise as a leading technology powerhouse. Now, in hindsight, it seems everyone has caught up, and the likes of VW and a handful of others appear doomed. Both EU and US analysts have leaped straight from denial to grudging acceptance.
But hereās the thing: I wouldnāt bet heavily on China's long-term future.
Hear me out.
Chinaās economic trajectory is becoming increasingly precarious. The first elephant in the room is its real estate sector, which has shifted from being a cornerstone of growth to a major liability. Developers like Evergrande have defaulted on enormous debts, leaving projects unfinished and eroding consumer trust. This collapse has wiped out $18 trillion of household wealth since 2021, a staggering hit that not only stifles consumer spending but also shatters public trust in the government.
In a society like China's, where trust operates at a low baseline, such a betrayal is seismic. While Chinese culture may not change quickly, it does changeāand it places high value on demonstrated reliability. Failure to meet promisesāwhether about baby creams or political stabilityāleads to swift judgment and rejection, albeit on different timelines.
The second elephant in the room is the demographic time bomb, eerily reminiscent of Japanās post-boom stagnation. Chinaās population is aging at breakneck speed, while birth rates plummet. By 2050, nearly a third of the population is projected to be 65 or older. This imbalance threatens to overwhelm social services, shrink the workforce, and exacerbate the pension crisis, which the government has already signaled as a target for cuts.
Layered on top of this is a younger generation increasingly disillusioned with the rigid social contract. Theyāre not agitating for Western ideals like liberty or democracy but simply want lives with dignityāfree of food scandals and 80-hour workweeks. This shift undermines the very foundation of Chinaās labor-intensive economic model.
And then thereās the third and last elephant in the room: the South China Seaāa geopolitical minefield. Chinaās aggressive posturing risks dragging the country into conflict. While its economy could survive for a while in war mode, driven by its internal market and a few allies, the question looms: How ready is its younger generation of entrepreneurs and innovators to support a prolonged war effort?
That said, China isnāt on the brink of becoming an economic wasteland overnight. Its economy remains formidable, having mastered Western practices and developed large-scale technological capabilities. Yet the convergence of internal discontent, demographic decline, and geopolitical risks creates a series of no-win scenarios. Whether the government doubles down, shifts to war mode, or undergoes regime change, each path seems to lead to further instability. Even a change in leadership might trigger new chaos as regional authorities reveal how much theyāve been misleading Beijing about local realities.
For my European clients, the question is pragmatic: How much should we continue investing in China? How aggressively should we pursue local innovation?
As 2025 begins, my advice is simple: tread lightly.
Philippe MEDA
Philippe MEDA
Philippe MEDA
Philippe MEDA
