Why China is not as powerful as the West might think

STUART LAU AND PHELIM KINE

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President Xi Jinping wants to project China as a powerful trade partner — or dangerous adversary — to virtually any country hoping to be successful in the 21st century.

“The rise of the East, and the decline of the West” is his motto. As Chinese growth rocketed and Western politicians fretted over how to respond, it became a national catchphrase, too.

But among the Chinese people — and increasingly in the chancelleries and boardrooms of Europe — a different story is beginning to be told: Beijing’s march toward global economic domination may not be invincible after all.

China managed only weak GDP growth after belatedly liberating itself from pandemic restrictions. The property market is in crisis and youth unemployment has risen to hazardous levels, with one estimate putting it at 50 percent. Private entrepreneurs increasingly live in fear of what the state will do to their businesses and consumers have stopped spending the way they did in the pre-COVID good times.

In Shanghai, London and New York, Chinese and foreign businesses alike are now grappling with a new scenario: What if the slowdown is here to stay?

“The risks of a major economic crisis in China, or perhaps more probable an imminent stagnation in sustainable economic growth, are […] rising,” Jacob Kirkegaard, senior fellow at the Peterson Institute For International Economics, told POLITICO.

What happens to China’s economy matters hugely for the world.

According to the latest statistics, the Chinese economy grew at a weak pace in the second quarter of this year, with GDP just 0.8 percent up in April-June from the previous quarter, on a seasonally adjusted basis. Year-on-year, GDP expanded 6.3 percent in the second quarter — below the 7.3 percent forecast.

These numbers are still far healthier than most Western economies can boast.

But the uncertain outlook adds to doubts over how Beijing will approach the West. For now, the jury is still out on whether Xi will put on a friendlier face or if instead tougher economic times will embolden Communist Party hardliners to seek out flashpoints with the U.S. or Europe to distract public opinion and shore up nationalistic sentiment.

Even the Communist Party leaders aren’t hiding their problem. At their annual pre-summer Politburo meeting, which sets the tone for the economic work for the remainder of the year, party officials judged that the economy “is facing new difficulties and challenges, mainly due to insufficient domestic demand, difficulties in the operation of some enterprises, many risks and hidden dangers in key areas, and a grim and complex external environment,” state news agency Xinhua quoted the Politburo as saying.

Getting out

In Europe, as well as the U.S., governments are reassessing their own economic vulnerabilities radically. Russia’s invasion of Ukraine shocked EU governments into revising their dependence on supply chains controlled by potentially unfriendly regimes.

Europe mostly has decoupled itself from imports of Russian fossil fuels but remains reliant on China for critical raw materials that make up battery components that will be vital for the green energy transition, among other areas. President Xi Jinping wants to project China as a powerful trade partner — or dangerous adversary — to virtually any country hoping to be successful in the 21st century | Pool photo by Leah Millis via AFP/Getty Images

Western leaders from the EU’s Ursula von der Leyen to U.S. President Joe Biden now routinely talk about economic “de-risking” from China. The peril of linking too closely to the Chinese economy has even hit home with Olaf Scholz, traditionally seen as Europe’s leading dove on China policy.

Behind closed doors in the October summit of the European Council last year, Scholz shared his fears about China’s outlook. Speaking shortly before his first trip as German leader to Beijing, he told his EU counterparts that “a massive financial crisis” could be triggered if Beijing failed to manage its property crisis, according to two diplomats briefed on the conversation, who were granted anonymity to speak candidly.

Italy’s new prime minister, Giorgia Meloni, is preparing to pull out of a deal under which Rome signed up to be part of Xi’s global infrastructure plan, the Belt and Road Initiative. And the government of Emmanuel Macron, the French president, has in recent weeks taken a more critical line toward Beijing, especially over its stance on Ukraine.

Against that backdrop, the Beijing government is now focused on engaging with the West in a less frosty manner, even when it comes to its arch-rival in Washington. Several U.S. officials — from Secretary of State Antony Blinken to Treasury Secretary Janet Yellen — have visited China in recent months, and Commerce Secretary Gina Raimondo is expected to go later this summer. An EU-China summit is also in the pipeline, according to one diplomat speaking anonymously because the plans are yet to be finalized.

Beijing is also keen to reassure private businesses in China, but it doesn’t seem to be working. China managed only weak GDP growth after belatedly liberating itself from pandemic restrictions | AFP via Getty Images

“What we saw was actually a decrease in the overall confidence level” among 570 EU companies operating in China who took part in a recent survey, according to Jens Eskelund, president of the EU Chamber of Commerce in China. “And a lot of that has to do with an increased level of uncertainty where China is, in particular about the Chinese economy,” said Eskelund, whose chamber represents 1,700 mostly European companies and entities in China.

Xi consistently demonstrated a preference for the state-owned sector. His most radical moves against the private sector have been targeted at tech giants, even though they’re widely considered the best hope for China to compete with the West. On Xi’s watch, the Chinese bureaucracy has cracked down on multinational e-commerce platform Alibaba’s billionaire-founder Jack Ma, restricted the development of online gaming and private tutorial classes, and heavily regulated data even for foreign companies.

Some Western companies are already looking elsewhere. According to Eskelund, the EU chamber chief, 11 percent of businesses surveyed last year said they were weighing up whether to leave China. This year, the exact same share of companies reported they had already taken the decision to go.

“When you’re sitting in an economy that is growing 10 percent per year, it’s good for everyone,” Eskelund said. “If you’re slowing down to 5 percent, 5.5 percent, then there will be sectors of the economy that will not be growing the same way as before.”

Xi has accrued vast personal power at the apex of China’s political system. Whether Xi-conomics works in the end will depend to a large extent on him.