China's Economic Challenges: Slowdown or Collapse? By James Reed and Paul Walker

The essay: https://dailyreckoning.com/dont-fall-in-the-china-trap/

presents a stark, bearish assessment of China's economy, framing it as teetering on the brink of collapse with potential ripple effects on the global monetary system. It draws on recent data points like weakening industrial output, retail sales, and fixed-asset investment (FAI), alongside structural issues such as the real estate slump, demographic decline, high debt, and political instability. While these concerns are valid and reflect real headwinds, the picture is more complex: China's economy is decelerating, but remains resilient in key areas like high-tech manufacturing and exports, with official growth still tracking toward the government's ~5% target for 2025. Below, we'll break down the essay's main claims, cross-referencing them with the latest available data (as of November 2025), to provide a balanced analysis.

Recent Economic Indicators: Weakness Confirmed, But Not Catastrophic

The essay highlights October 2025 data as evidence of a sharp downturn. Official releases from China's National Bureau of Statistics (NBS) largely align with these figures, showing moderation across core metrics:

High-tech sectors (e.g., equipment manufacturing +8%, high-tech +7.2%) outperformed, buoyed by state support. Mining weakened, but overall output remains positive.

Fragile; crashes in appliances (-14.9%), autos (-6.6%); smallest increase in years.

Urban sales +2.7%, rural +4.1%; online retail +9.6% YTD shows e-commerce strength. Holiday distortions (e.g., Golden Week) contributed to softness.

Private investment -4.5%; ex-property, FAI +1.7%. Investment drives ~45% of GDP, so this drag is significant but offset by exports (Q3 trade surplus widened).

These metrics indicate a loss of momentum, exacerbated by post-COVID reopenings that underperformed and stimulus measures (e.g., 2024-2025 rate cuts) that failed to ignite demand. Exports, a bright spot, dipped -1.1% in October but grew +6.0% in Q3 overall. Unemployment ticked down to 5.1% in October, but consumer confidence remains subdued amid deflationary pressures (CPI +0.1% YoY).

Real Estate: A Prolonged Crisis, But Contained So Far

The essay's core alarm — a multi-year property crash wiping out household wealth — is well-substantiated. Evergrande's $300B+ debt default in 2021 triggered a sector-wide reckoning, with firms like Country Garden ($11B losses) and Sunac (bankruptcy filing in 2023) following suit. A high-yield real estate index has indeed plunged ~82% from peaks and shows no recovery. Property investment's -14.7% YTD drop in 2025 underscores the pain, eroding ~70% of household wealth tied to real estate and curbing consumption.

However, Beijing's interventions (e.g., local government bond quotas up 4.4% for 2025, subsidies for unsold inventory) have prevented a full systemic meltdown. New home prices fell at the fastest pace in seven months in May 2025, but sales stabilised somewhat in Q3 due to urbanisation-driven upgrades. The crisis has shaved ~1.5-2.5 percentage points off GDP growth annually, but it's not yet derailing the broader economy.

GDP Growth: Official Figures vs. Scepticism

The essay invokes Goodhart's Law to argue official GDP is inflated, estimating "true" growth at ~2.5% or even negative after adjusting for wasteful investment (e.g., ghost cities). Q3 2025 GDP came in at +4.8% YoY (1.1% QoQ), down from +5.2% in Q2, with H1 at +5.3%, on track for ~5% annually. Independent estimates (e.g., Rhodium Group) peg 2024 growth at 2.4-2.8%, and similar doubts persist for 2025 due to statistical tweaks.

If investment's inefficiencies were GAAP-adjusted, growth could indeed be lower, but exports (+8.4% in September) and services resilience provide buffers. Nominal GDP grew just +3.7% in Q3, signalling pricing weakness and profit squeezes.

Structural Headwinds: Debt, Demographics, and the Middle-Income Trap

Debt-to-GDP: The essay's 300% figure likely refers to total (household + corporate + government) debt, which hit ~300% by mid-2025 per BIS data, double the U.S.'s 123%. Official government debt is lower (~68.7-96%), but hidden local government financing vehicles (LGFVs) add risk. Ratios >90% do hinder growth, and solutions (default, inflation, austerity) are unpalatable. Beijing raised the deficit-to-GDP target to 4% for 2025, signalling tolerance for more borrowing.

Demographics: China's population fell to ~1.408B in 2024 (third straight decline), projected to drop to 1.36B by 2035 and halve to ~700M by 2075. Fertility is ~1.09 births/woman (vs. 2.1 replacement), with working-age population shrinking from 900M to 250M by mid-century. This could halve GDP via the workforce-productivity formula, starting now, urbanisation offsets some, but not all.

Middle-Income Trap: At ~$15K per capita GDP, China struggles with innovation (strong in theft/adaptation, weaker in proprietary tech). Only a handful of economies (e.g., South Korea) escaped post-WWII. AI and EVs show promise, but productivity growth slowed to ~1.9% (2010s average).

Political Turmoil: Rumours vs. Reality

Claims of a "soft military coup" subordinating Xi to PLA leadership stem from 2025 purges (e.g., Rocket Force generals, Miao Hua's removal in June). Xi has dismissed nine senior officers amid corruption probes, exposing nuclear arsenal management issues. Speculation of Xi's 16-day disappearance (May-June 2025) and factional infighting (e.g., Zhang Youxia's rising influence) fuels coup talk, but no verified evidence confirms it. Xi retains formal control via the Central Military Commission, though purges signal unease. Uncertainty deters FDI, which fell 29% in H1 2025.

Global Implications: Stormy Waters, But Not a Systemic Collapse

The essay warns of a global monetary unravelling, tied to China's woes amid weak growth elsewhere (Japan/UK negative, EU ~1%). World trade shrank 1.2% in Q3, and U.S.-China tariffs loom under Trump 2.0. Yet, China's $3.7T October trade volume (+0.1% YoY) and $14.3T GDP (Q1-Q3) underscore its scale, any hard landing would hurt commodities (e.g., Australian exports) and supply chains, but firewalls (e.g., capital controls) limit contagion. Wall Street's "panda-huggers" may overstate AI dominance, but China's export machine endures.

In a globalised world, China's storms affect everyone; expect choppy seas, but not a total shipwreck… yet.