China, as we knew it, is no more.
The country with a quickly growing economy and slowly opening society is gone. In its place is a withering economy and an increasingly authoritarian government controlled by one man: President Xi Jinping.
This new China is more dangerous than the old one. Its teetering property sector and aging population threatens to drag down the entire global economy. Xi’s willingness to attack industries and box out foreign investments poses a threat to the world’s financial stability. And the country’s strengthened military and desire for reunification with Taiwan is a threat to geopolitical stability.
There was once a time when the promise of China’s market may have been enough for American and European companies and governments to look past everything from government surveillance and overreach to intellectual property theft — but that time is over. In the Western capitals and boardrooms, it appears the horror of Beijing’s transformation has finally settled in, and the lure of China’s economic future is fading.
But the weaker China’s soft power becomes on the world stage, the more it will be tempted to resolve conflicts using its hard power. Beijing’s economic miracle machine has run out of steam, but that hasn’t curtailed its ambitions, and that leaves us with a China more dangerous than any we’ve seen before.
If you want a clue to just how far China’s economy has fallen, look no further than Beijing’s attempts to hide information about the country’s growth. Last week, during the Communist Party Congress — a gathering held every five years in which CCP leadership changes are made — the publication of China’s GDP report and other economic data points were delayed, then released after the Congress without warning. The numbers were bad — just 3.9% GDP growth in a year when policymakers projected it to grow by 5.5%. But that’s hardly the worst of it. Beijing has been slowly shrinking the amount of data it shares about the economy — a trend of opacity that shows no sign of abating.
More and more current and would-be investors are in the dark about what’s going on in China. But they do know that domestic demand has collapsed, the youth unemployment rate is hovering around 18%, and exports are the only thing keeping the economy going. Xi’s COVID Zero policy, which has kept the country in a state of rolling lockdowns for months, is crippling many businesses’ ability to function. Investors were hoping that Xi might lay out a plan to phase the policy out during the Congress, but that didn’t happen.
Beyond the short-term signs of trouble, there are more enduring signs pointing to China’s economic distress. The most visible is the slow implosion of the country’s property market. Moody’s estimates that 70% to 80% of Chinese wealth is tied up in property, and the real-estate sector makes up around 30% of GDP. In times of economic distress, the central and local governments have always leaned on property to spur growth regardless of demand. As a result, about 20% of China’s homes — around 65 million units — sit empty, and property developers are drowning in debt. To stop building, however, would mean economic disaster.
“Most of China is third- and fourth-tier cities that depend on property development for construction jobs,” Victor Shih, a UC San Diego professor, told me, adding that if the majority of these cities stopped construction tomorrow, “growth would be in deeply negative territory.”
Charlene Chu, a debt analyst at Autonomous Research, told me that over 40 property companies have gone bust since the beginning of this year, but the government has tried to contain the mess by spreading out losses across local governments and bank balance sheets across the country. “It’s not necessarily going to be catastrophic if they write off the property correctly,” Chu said.
That’s a big if, and even if Beijing is successful, the slow-moving blob of debt will choke off economic growth for years to come. Add to that a rapidly aging population and no social safety net to fall back on, and you’ve got a decades-long economic mess to untangle. In a recent essay in Foreign Affairs, Kevin Rudd, the former prime minister of Australia, called the economy — once the source of its strength — China’s “Achilles’ heel.”
Of course, the long-term problems are not lost on Xi. He wants to make the Chinese economy look more like the US economy — one that runs on domestic consumer spending rather than depending on massive debt-fueled infrastructure projects and exports; one that builds semiconductors and designs software, instead of forging iron and manufacturing phone screens. As Shih put it, China either “needs to make a lot more stuff or a lot more stuff of high value. Both will be very challenging.”
To get anywhere near there, Xi needs cooperation from the rest of the world to not only buy Chinese goods, but also to offer the expertise and technology that will help its economy level up. Unfortunately for Xi, the West is no longer cooperating. From banning Western companies from sharing semiconductor technology with Chinese firms to banning Chinese quasi-state firms from doing business in the West, the US and its allies are doing everything possible to prevent Beijing’s drive to become a self-sustaining, technological superpower.
Unless something drastic happens, China’s miraculous growth period is over, and it doesn’t seem like Xi has a clear plan to revive the economy. What was once a sign of the Chinese state’s revitalization and tool for it to exercise influence will be crippled. And that won’t just drag the global economy down, it’ll leave Beijing with fewer nonviolent options for wielding power.
Markets on the run
Investors — dizzy with concerns about inflation and the war in Ukraine — are still coming to grips with what it means to have an authoritarian superpower as the factory of the world. But it’s obvious investors believe that money that goes in will not generate the returns it once did. They are pulling their money out of China at a record rate.
“The days of China outpacing the rest of the world by multiples, those are over,” Chu told me. Investors used to be willing to overlook China’s endemic corruption because of the margin of growth, she explained. “But now that growth rate is coming back and it will start reverting to something we see in every other big economy. Then you have to ask — is it worth taking on additional risk?”
Xi has already shown that he’s willing to insert the state into China’s so-called private sector in ways the country has not seen in decades. Last year he shocked global markets by putting China’s fast-growing consumer-tech sector in a regulatory deep freeze. He also put billionaires on notice that their fortunes are at risk by initiating his drive for “common prosperity.” Wall Street was hoping these policy pronouncements were just shots across the bow, but that was wishful thinking.
The cadres that Xi has elevated to his inner circle are all yes-men, including one who oversaw a terrible Shanghai lockdown last year. Above all, Xi is dedicated to amassing power for himself and for the state (which is also him). During his next term — which may last the rest of his life — Xi’s Maoist ideology will drive all economic decision-making, just as it’s driving every other aspect of life in China from education to public health.
“We will protect lawful income, adjust excessive income, and prohibit illicit income,” Xi said at the Communist Party Congress this month. He mentioned the phrase “common prosperity” in his opening speech four times. The other word he mentioned over and over in his speech was security: Xi talked about “national” security, “technological” security, “cultural” security, and more. What Xi is saying is that all of these aspects of social life are now under threat and require state control for the public good.
On paper — that is to say, in research notes and in marketing materials — Wall Street is still playing nice. This is a necessity, as Beijing has made it clear to the big banks that they are not to say anything negative about China’s economy or actions to investors and the public. But in precarious moments like these, it is important to watch what Wall Street says not just on paper but also in person. And if you listen closely, you can hear just how shaken Wall Street’s faith in China and its markets has become.
In September, at CNBC’s Delivering Alpha Conference, the former TIAA CEO Roger Ferguson said he wouldn’t call China “uninvestable” because it’s “too big to ignore,” but he would say it is “mismanaged.” Dan Ives from PIMCO also said he wouldn’t call China “uninvestable,” but that it’s “hard to invest in a market and an economy that hasn’t been tested in terms of restructuring.” Challenges are coming, and it’s unclear if Beijing is ready.
In the staid world of international finance, these statements are akin to backing away from someone very slowly without breaking eye contact. This is as close as it gets to stark warnings from bankers — people who are paid to be so boring that they upset no one, especially not the boss of the second-largest economy in the world.
At the ready
Under Xi Jinping, China’s soft power has weakened. His aggressive interference in the economy is scaring investors and pushing companies to make goods elsewhere. His regime’s aggressive diplomacy and support for Russia has turned off European governments and citizens.
All of this has left China more isolated and more dependent on hard power to maintain its influence on the world stage. US intelligence has warned that China is stepping up influence operations here and around the world. The head of the US Navy and the CIA have spoken about China attacking Taiwan — an island in the South China Sea that the CCP has claimed as its own since its political opposition fled there after China’s civil war in 1937 — in the near future as a foregone conclusion. But such an attack would be extremely damaging right now. China is a net food and energy importer, and earlier this year, Ryan Hass, a senior fellow at Brookings, told me that the US still has the ability to inflict major pain by blockading China from the sea.
“You can envision a scenario where the US Navy impounds ships traveling to China containing oil in neutral ports until cessation of hostilities,” he said. He also suggested the US might limit China’s access to financial markets.
Beijing is working tirelessly to find ways to get over these hurdles. Though Xi did not discuss economic reform during the CCP Congress, there was significant time spent on the development of the People’s Liberation Army, China’s military force. Perhaps more ominously, David Finkelstein, the vice president of the Center for Naval Analyses, pointed out that two key CCP phrases were “hedged” from Xi’s Congress report. For the past few decades the reports have said that China is in a “strategic period of peace and opportunity” and that the “world is in an era of peace and development.” By cutting these two phrases, it’s clear that Xi is increasingly worried about China’s position in the world.
A PLA planner probably looks at China’s neighbors and gets nervous, Finkelstein said. China has fought with India and Vietnam in the past 60 years. Japan is rebuilding its military. The US — still with the most powerful, combat-ready military in the world — is looming across the Pacific. “You live in a nasty neighborhood if you’re a military planner,” Finkelstein told me. That does not mean the PLA believes it’s ready for a major military action, like taking Taiwan, but it does mean that China’s military “is being told it needs to accelerate its march toward modernization.”
For the US’s part, this means we need to find more lasting deterrents to Chinese aggression if there is to be peace in East Asia. Taiwan’s “Silicon Shield” of advanced semiconductor plants make it crucial to the global economy, but Shih told me it’s likely Beijing has already priced in damage to those plants in its calculations for conquest. Peace used to be held together by US assurances that it would not recognize Taiwan, Taiwan’s assurances that it would not declare independence, and China’s assurance that it would not attack Taiwan. That arrangement won’t work anymore.
It will take multiple countries working in coordination with the US to deter China from its most aggressive ambitions. But US diplomacy has been disjointed, under-resourced, and outmaneuvered over the past few administrations, Nahal Toosi wrote in Politico. Part of this is because China’s diplomacy has been so aggressive. Beijing is able to order state-owned or quasi-state-owned enterprises to invest wherever it demands. This “commercial diplomacy” has given China an edge all around the world, especially in parts of Latin America and Africa.
But as its economy weakens, it will be less able to use its economic might to persuade or coerce other nations to accept its behavior. That could push Beijing to even more aggressive action using a more modernized, capable military, for example. In a world without carrots, all you have left are the sticks.
Linette Lopez is a senior correspondent at Insider.