In the past six months or so, the economic situation in China has been characterized by a series of bad news, such as the withdrawal of foreign capital, stagnant economic growth, real estate crisis, weak export trade and Renminbi, and record-high youth unemployment rate. US President Joe Biden said at a public event that China’s economy, the world’s second largest, is like a ticking time bomb, and hinted at the emergence of anti-Xi Jinping voices in domestic politics. Xi Jinping, the incumbent leader of the Chinese Communist Party(CCP), responded immediately, emphasizing that China’s economy is full of potential, resilience, and vitality, with the world’s largest industry and industrial organization, a well-developed infrastructure, and a huge domestic demand market of more than 1.4 billion people.
According to the vastly different views of the two heads of state, who should we believe in? Perhaps it would be better to take a look at the real impact of mainland China’s lacklustre economy over the past six months or so. First, countries in Asia and Africa have been hit hard. Japan, for example, saw its first negative growth in export trade in more than two years in July. The central banks of Korea and Thailand have lowered their own projected growth rates in response to the lack of economic recovery in China. However, the pros and cons are always intertwined, and the fact that China’s economy is slowing down and at the same time slipping into deflation, and that the prices of many commodities on the global market are starting to fall, is good news for some inflationary countries such as the US.
In fact, China’s own deflation should not be a cause for undue concern, unless many other major international economies are in recession at the same time. According to a new Bloomberg survey, the offshore RMB is likely to slip to 7.6 renminbi per US dollar this year, or about 4 percent below the recent rate. If this prediction comes true, it will not be good news for many countries in Asia, Latin America, Central and Eastern Europe, because China is an export-oriented economy, and the RMB has already become an international currency to a certain extent, so if the depreciation continues, it will be a huge pressure on countries that also rely on export trade to support their economic growth. However, on top of the currency depreciation, the interest rate cuts in China this year have impacted the attractiveness of its bond issues in the international investment market. As a result, the overseas share of sovereign bonds issued by the CCP has fallen to its lowest since 2019, while sales of Japanese “samurai bonds” have risen sharply, with 845.2 billion yen (5.8 billion USD) traded.
It is clear from the above that the economic downturn in China does affect other countries, but it is a tragedy for some and a benefit for others. But curiously, what are Beijing’s calculations if China’s economy does not recover in the near future? To clarify this, one must first consider the true value of international trade to the Communist regime. In particular, what role does trade play in the relationship between Beijing and the Washington, D.C.? Looking back at China from 1978 to the present, openness and political and economic reforms have been the key twin engines that have led to its transformation from the “Great Famine (1959-1962)” into an “economic powerhouse,” becoming the cornerstone of the legitimacy of the CCP’s longstanding dictatorship. In addition, by joining the World Trade Organization, the PRC has built up economic interdependence with a number of regional and extra-regional countries, thus minimizing the risk of uncontrollable military conflicts or disputes. In fact, if it were not for the fact that China is a major player in the global trade market, it would be very difficult for Beijing to “weaponize” its economic governance. However, if external trade is so important and crucial, will the current economic dilemma of China compel Beijing to make compromises in the face of pressure from the US or other countries?
This article argues that one should not assume that the current economic downturn will make Beijing more likely to make political concessions. On the contrary, it is highly likely that Beijing will be more insistent on maneuvering with the US or its allies within its own expected script. Why is this so?
Xi Jinping has publicly stated on more than one occasion that China needs to reduce its dependence on the West; therefore, if the Beijing authorities engage in any political or economic reforms in the future, they will only be based on the realization of the “quality investment” that Xi Jinping is seeking. In other words, reforms will only take place when the CCP feels that it is lagging behind and that it can gain access to foreign expertise or technology through openness. That’s why the US sent Treasury Secretary Janet Yellen to China in early July this year, where she met with Premier Li Qiang and a number of economists over just four days to discuss decoupling, export controls on rare-earth metals, and cooperation on climate change between the two countries. In late August of the same year, Commerce Secretary Gina Raimondo also traveled to China, where she met with Li Qiang, as well as the CCP’s Minister of Commerce, Wang Wentao, and others. Raimondo later said that the US welcomes and supports China’s economic development and has no intention of curbing it, nor seeking to decouple from China, and that is willing to cooperate with China in the areas of artificial intelligence and climate change.
It is clear that the US is no more passive than Beijing when it comes to cooperation on economic and trade matters, even though its domestic economy is currently in better shape than China. As for climate change management in the face of global warming, the US and China are both not in a hurry to form a cooperative relationship, as their combined carbon emissions already account for about 45 percent of the world’s, and their own domestic green energy production is gradually increasing, making them undoubtedly key players in shaping international carbon emissions and energy consumption, as well as the future market for renewable energy. Under these circumstances, even if the US and China were to passively refrain from cooperating with international carbon emission reduction mechanisms or to delay the establishment of the hoped-for climate cooperation, it would still be a very destructive form of “inaction.” It thus suggests that Beijing is more interested in winning bargaining chips in many international negotiating forums through its status as a “major carbon emitter” than it is in developing climate cooperation with the US. Adding insult to injury, the growing rivalry and conflict between the US and China makes it difficult for at least either of them, to be optimistic about future trade expectations, thus increasing the risk of military conflict in an atmosphere of uncertainty (trade expectations theory).
Looking back at China after the reform and opening up in 1978 and before the COVID-19 outbreak, it can be said that it was an economically ambivalent existence. On the one hand, as an authoritarian government, Beijing’s top-down authoritarianism did not always seem to be ironclad. For example, in order to get the economy off the ground, the CCP has gone to great lengths to grant considerable freedom of private economic activity in the countryside, even going so far as to open up the countryside more than Shanghai did after 1990. However, it should not be forgotten that the CCP’s main goal in intervening and promoting economic activity at that time was to strongly support private investment in technology and the production of patents, which spawned large corporations such as Alibaba, Tencent, Baidu and Huawei. This put the Beijing Consensus on the international stage, rivaling the Washington Consensus, and gave many developing countries in Asia, Africa and Latin America a choice of development models, and even led to a special issue of The Economist discussing whether state capitalism was better than the free capital markets of classical economics. Unfortunately, Xi Jinping’s rise to power has gradually eliminated much of the room for free movement in the domestic economic market, and he has used the 20th National Congress of the Communist Party to secure a third term in office, placing loyalists rather than professional bureaucrats on the Politburo Standing Committee, which has the power to make major policy decisions.
According to Xi Jinping’s way of consolidating power, even if there is any major flaw in Beijing’s administration, the whole “party” will only play deaf and dumb. However, the price is that the economic vitality and innovative potential of the entire China will not be realized, and there will be no balancing mechanism in the political system. This means that the decisions made by Xi will affect more people, but the quality of the decisions will only worsen. As poor quality policies fail to reverse the many dilemmas facing the CCP, civil discontent will grow, leading to the possibility of more intense surveillance, censorship, and repression, as well as a technologically-enabled, authoritarian digital rule of China.
In conclusion, the economy of China is unlikely to recover easily, while its politics is in a state of disarray. All in all, the CCP, with its dominant leadership, is catalyzing its own dysfunctional governance and the economic dilemma of the whole country. It is advisable for Taiwan, for all its proximity to China, to think and plan ahead on how to cope with the “post-economically rising China,” instead of just thinking about how to stabilize its own economic development in the “post-epidemic era.”
(Wayne Tan, Professor at Graduate Institute of International Politics, National Chung Hsing University)