While others have been worried about China's supposed strengths, I am actually worried about its weaknesses and potential impact on world politics. I have already discussed that their industrial pollution and lack of affordable housing are unsustainable. The housing issue arises from two policies that work to prevent a healthy real estate market. First, Chinese workers are forced to save with state sponsored banks at low interest rates. Lacking healthy returns, they cannot effectively save to purchase real estate. Second, the banks, while flush with cash, have been directed to loan to "strategic" businesses. Until lately, that has not included businesses building apartments or homes.
A new trend is appearing that also bodes ill. China's economic expansion to date has been largely dependent upon export driven growth, but limits on its ability to export might drive its foreign policy in a more belligerent direction, since the benefits of free trade that accompany peaceful accommodation are lowered. We are now seeing wage inflation in China continuing unabated. Over at Carpe Diem, Professor Perry has posited that the rise in Chinese wages has contributed to significant reshoring of American manufacturing capacity. This has the same net effect as trade restrictions on Chinese exports. I believe that China's military bellicosity has been held in check because their economic dependence on exports gave them an interest in preventing overt actions that would disrupt world trade. As a result, they have confined their military efforts to a build up of capability and to cyber attacks and espionage because these would not harm exports.
If export driven growth dries up, causing a recession, I believe the incentives regarding threatening a Taiwan invasion will change. Chinese annexation of Taiwan, against the wishes of those people would be a disaster for the world order. One of the bedrock principles of American foreign policy has been that borders of nation-states may not be changed by force. It is in our interest to keep this concept sacrosanct, in order to prevent a tipping point of global land grabbing that we lack the military might to stop on more than one front at a time. If Taiwan resisted by force of arms, with U.S. aid, it would be bloody and highly disruptive to the world economy.
I don't think the trend line is so drastic that China's exports will dry up overnight, but it is a long term strategic trend that requires watching.