Commentary on Political Economy

Thursday 10 August 2023



Take Over the World? Not on This Budget

A cratering economy and demographic headwinds are going to force some hard choices on Xi Jinping. 

Xi needs to retrench.

Photographer: Lam Yik/Bloomberg

Xi Jinping’s confidence in China’s unstoppable economic rise has driven much of his grand strategy. In the early years of his rule, it led China’s president to undertake an ambitious expansion of Chinese influence abroad, rapid military modernization, and mega-projects such as the trillion-dollar Belt-and-Road Initiative.

After Sino-American relations ruptured in the wake of former US president Donald Trump’s trade war, conviction that time was on China’s side likely played a part in Xi’s decision not to compromise. “In our culture, we punch back,” the Chinese strongman reportedly said in June 2018.

Now, though, Xi can ill afford such bravado.

The Chinese economy is caught in an unrelenting downward spiral. Instead of an anticipated boom after the end of Covid-zero, exports are plungingyouth unemployment has reached a historical high, and deflation threatens to trap the economy in stagnation.

Xi also stares at grim long-term prospects. Demographically, the country is aging fast and, in 2022, its population likely shrank for the first time since the Great Leap Forward famine six decades ago. Escalating geopolitical tensions will limit China’s access to Western markets, technology, and capital, further denting its growth potential.

Xi confronts three stark strategic choices.

On the one hand, he could stay positive and continue the course he has charted since 2013. But sustaining a respectable growth rate while decoupling from the West and dealing with a shrinking labor force would require reversing his government’s business-unfriendly measures.

That’s not an attractive solution, since such a step could call into question his leadership. Indeed, so far the government has only tried to talk up the economy rather than abandon the policies that have demolished its credibility among private entrepreneurs.

Xi could also try to divert domestic attention to conflicts abroad, in particular with the US, which Xi has publicly accused of leading a campaign of “comprehensive containment, encirclement and suppression” against China.

But provoking a fight from a position of weakness risks disaster. Although Xi would get a quick boost in public support, a clash with the US that ends in a decisive military defeat could imperil the survival of the Chinese Communist Party.

The third course is to retrench. Xi would have to curtail some of his ambitious foreign policy projects, in particular the Belt and Road Initiative, which has already cost China $240 billion in dud loans, according to one study.

Geographically, Xi would have to prioritize the Indo-Pacific, the epicenter of Sino-American rivalry. As Europe’s strategic neutrality is also crucial, it makes sense for Xi to stay engaged in the region. However, Chinese success there hinges on the outcome of the war in Ukraine and the role China plays in resolving — or fueling — the deadliest conflict in Europe since World War Two.

China’s ambitions in regions such as Africa, the Middle East, and Latin America would have to be scaled back. Even though China has increased its geopolitical clout and broadened access to commodities in the global south — in part because of decades of US neglect — a slow-growing economy at home will not allow it to spend as freely as when its coffers were flush.

At the same time, China would have to maintain strategic discipline. A weaker power can stay in a fight against a stronger opponent only if it expends its more limited resources with greater economy and prudence.

Practically, this would require China to avoid a costly arms race and compensate for its inferior hard power with more skillful diplomacy and better anger management. Instead of getting tough, China must be ready to lose some face and improve ties with neighbors it has alienated in recent years, such as Japan, India, the Philippines, and Australia. When dealing with Taiwan, restraint is likely to serve China better than bellicosity.

While this third way surely doesn’t appeal to Xi because it implies a retreat from his own grand strategy, it may be his least bad option.


China’s economic woes should give the US more confidence about its ability to prevail in the long run. Nevertheless, it must also exercise strategic discipline. Like Beijing, Washington must be selective about where to contest Chinese power and where to avoid needless entanglements. It shouldn’t waste energy and resources obsessing over Chinese influence in every corner of the globe and every global institution.

During the Cold War, neither the US nor the Soviet Union maintained such discipline, with horrific consequences. The US fought a needless war in Vietnam and Russia blundered into Afghanistan. Both wasted vast sums on weapons that ultimately became scrap metal. Just because the US prevailed then doesn’t mean it need make the same mistakes now.

No comments:

Post a Comment