by Jim Rickards, Daily Reckoning:
When we use the phrase cracking up, we don’t mean an immediate and catastrophic collapse. Instead, we refer to a breakdown in the political, economic and geopolitical spheres that imply a severe weakening in the power of the Chinese Communist Party (CCP) and perhaps even the fall of the CCP over the course of the next few years. That would be a momentous development by any measure.
Of course, such turmoil would not be confined to China and would impact the other global powers including the U.S., Russia and the EU. Even the early stages of such a collapse – happening now – are of enormous consequence for investors. Let’s break this down into politics, economics and geopolitics for an overview of the crisis in China.
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The Fall of Xi Jinping
President Xi Jinping of China has lost much, if not all, of his political power. The People’s Liberation Army (PLA), which includes the air force, navy and rocket force is now under the firm control of General Zhang Youxia. Formerly, Zhang was part of a Central Military Commission of which Xi was Chair. Today, Zhang is head of a Central Party Decision-Making and Coordination Body (CP/DMCB), a newly formed entity. Xi is now subordinate to the CP/DMCB, which leaves him no longer in control of the military. This de facto coup was over a year in the making.
Xi Jinping was missing from public view for about six weeks in June and July 2024. When he reappeared in August 2024, he was photographed with a patch of his hair shaved, which could indicate the aftermath of serious neurosurgery. This could have been in response to a transient stroke or other disturbance in the brain.
Power Struggle. China’s economy is far weaker than official reports and Wall Street analysts suggest. That is not the most important news emerging from China. Credible reports suggest that President Xi Jinping’s power has been reduced considerably, and he is now subordinate to an oversight committee led by the head of the People’s Liberation Army. This could presage political chaos as factions struggle for power
It was at this point that the decision was taken to create the CP/DMCB. The announcement was delayed for a year in order give the Politburo time to consider successors and not to disturb U.S.-China relations ahead of the U.S. presidential election.
Other signs of Xi Jinping’s fall from power include the disappearance of General Miao Hua, who was Xi’s top ally in the uniformed military. Xi Jinping’s failure to attend the BRICS Leaders’ Summit in Rio de Janeiro in early July is consistent with this apparent loss of power. Xi does have some remaining power on the civilian side of the CCP, but even that is weakening.
It’s unclear what happens next. The military is turning to factions loyal to Hu Jintao (a former president of China) and Jiang Ximin (another former president who died in 2022) for guidance. Xi has lost what the Chinese call The Mandate of Heaven, the source of political legitimacy. We may see a scramble for power among competing factions or see the CCP turn into a military dictatorship. In all events, political chaos is emerging quickly.
All of this is consistent with 5,000 years of Chinese history. China goes through centuries of centralization including under the emperors of the Shang Dynasty (1600-1046 BC), the Tang Dynasty (618-907 AD) and the Ming Dynasty (1368-1644 AD).
These periods of centralization are followed by periods of decentralization and chaos such as the Three Kingdoms period (220-280 AD), the Sixteen Kingdoms period (304-439 AD) and the period from 1840-1949 AD that included the Opium Wars, the Taiping Rebellion, the Boxer Rebellion, the Warlord period and the Japanese invasion before and during World War II. If the CCP is regarded as a kind of Peasant Dynasty (1949-2025) reaching a peak of centralization at the 20th Party Congress that gave Xi an unprecedented third term in 2022, then decentralization (even disintegration) should not be unexpected.
An Economic Nightmare
The Chinese political stress comes on top of growing economic distress in China. On July 15, 2025, China reported that its economic growth in the second quarter of 2025 was 5.2% (annualized) compared with 5.4% in the first quarter. It’s important to understand that those growth figures are overstated at best and more likely complete fabrications.
Chinese GDP consists of about 45% investment. That investment level is high compared to a mature industrial economy. Investment can be a good path to growth if the investment is prudently allocated in ways that promote growth and cover the cost of capital. Neither condition is true in China. About half of Chinese investment is wasted on ghost cities (large scale urban construction that is completely empty and gradually deteriorating) or white elephant projects such as the Nanjing South train station, which has 128 escalators and relatively little passenger traffic.
If China’s wasted investment were written off (as required under International Accounting Standards), its GDP growth would fall from 5.2% to 4.0%. Even that is an overstatement because China ignores non-performing loans and props up its banks and currency with non-economic bailouts. In fact, China may be in technical recession today.
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