The world’s second-largest economy is sputtering. China’s official 2023 growth rate of 5.2 percent (of which some are skeptical) is roughly half that of the pre-pandemic decade. Exports and imports are down and foreign investment into China fell by 8 percent. As Chatham House put it, “long term capital … seems to be voting with its feet.” Unemployment among China’s youth is so high that for a time the government stopped publishing the rate. The long-feared bursting of a real estate bubble and falling prices now spark worries of a slide into devastating deflation.
But Western powers — especially adversaries — should take no pleasure in China’s difficulties. Unlike the Cold War, when the Soviet Union’s global economic stake was marginal, China is a major international economic force, accounting for 18 percent of global GDP. It is the world’s largest exporter and second-leading destination for imports. China’s foreign trade equals more than one-third of its GDP and it is the leading trading partner for 120 countries, including the largest economies in Asia, Africa and Latin America. The European Union takes more imports from China than from any other country.
China is the source of more than 10 percent of global foreign direct investment. It also holds roughly 11 percent of U.S. Treasury bonds, and its extensive Belt-and-Road Initiative gives it a significant footprint in more than 150 countries. For both advanced and emerging economies, slumps in Chinese demand or production or wrenching policy shifts will have enormous effects.
Many factors have produced this wobbling economy. Overinvestment in industry, weak consumer spending and an explosion of debt have combined with political restrictions to distort development. The need for social control — reflected in birthrate policies and pandemic lockdowns — has damaged national economic vigor. Ideology compounds the difficulties, such as when the need for growing consumer spending collides with reluctance to try stimulus measures that might favor the private sector.
Externally, U.S. tariffs have hurt key sector exports to China’s largest customer. Washington has persuaded the Netherlands and Japan to join its export controls on equipment for advanced semiconductors, and both the U.S. and the EU have increased scrutiny of Chinese investment. Politically, the global milieu for China has become decidedly less friendly due to Beijing’s handling of COVID-19, its domestic repression and China’s parroting of Russian justifications for invading Ukraine.
Whatever the causes, a slumping China is not something the West should wish for. In addition to the ripple effects of a deep slide, an economically challenged regime in Beijing may become more politically problematical and dangerous.
While authoritarian leaders are not vulnerable to genuine popular elections or recall, they can, ironically, be replaced at any time. They must find a way to keep key constituencies satisfied. In the words of political scientist David Easton, they need “output support.” Successive Chinese leaders have purchased this support by encouraging the growth of a huge, prosperous Chinese middle class and providing them with goods, travel and bright prospects for their children — in return for political compliance.
But this arrangement requires a growing and diverse economy. Sagging growth rates and disappearing prospects — seen in high youth unemployment — jeopardize this implicit deal.
Unable to keep their end of the economic bargain, such regimes often turn to the currency of nationalism. Society is paid off with the provision of symbolic goods: “resoluteness” in the face of external hostility; assertion of sovereignty over neighboring seas; and pledges to restore territorial integrity (i.e. Taiwan) “by force if necessary.”
Aggressively brandishing the national flag to the world to make up for failures at home does not make cooperation between China and its adversaries impossible, but it may stay at the margins. Xi Jinping’s recent American visit produced promises from Beijing to hamper the flow of opioid drugs into the U.S. and a partial reopening of military-to-military ties. Similarly, a China-EU summit in December produced a resumption of high-level dialogues on some trade issues. But the landmark Comprehensive Agreement on Investment, the product of 10 years of negotiation aimed at ensuring market access and equal treatment in China for EU companies, remains sidelined by European concerns over China’s support for Russia and attacks on civil liberties at home. When the president of the European Commission, Ursula von der Leyen, visited Beijing last spring, she said this major treaty “did not come up.”
A weaker China may also have less incentive for collaboration, and not just with the West. Beijing’s Belt-and-Road Initiative has turned into a major debt creation and collection enterprise, with negative political fallout. Alarm bells went off last year when Beijing sold off more than $20 billion in U.S. Treasury bonds and stocks. Though in-depth analysis showed that China’s holdings of U.S. reserves remain stable, there are clearly those in Beijing who prefer “balancing” China’s holdings as a hedge against the “weaponizing” of trade by America.
Most directly, U.S. restrictions on advanced semiconductor machinery have spurred China’s effort to develop its own capacities. Combined with Beijing’s long-held territorial orientation, this might make Taiwan — the source of 90 percent of the world’s advanced microchips — an even more tempting “acquisition.”
China is long way from checking out, of course. Exports still account for some 20 percent of Chinese GDP and outbound foreign direct investment did rebound a bit in 2023. But as China’s role in the global economy diminishes and its sense of threat increases, it will have less reason to work for a cooperative framework. The creation of its own international institutions, like the Asian Infrastructure Investment Bank, and efforts to reduce the dominance of the dollar mirror domestic movement toward autarchy.
These dynamics — assertive nationalism and separation from a hostile global environment — intersect more forcefully at a time of weak economic performance The need to keep an important domestic constituency happy blends seamlessly with nationalist campaigns. Even as it searches for the right economic instruments, Beijing asserts that American-led sanctions and restrictions on trade and investment are part of an attempt to preserve U.S. global dominance. A threatened and weakened China is more likely to adopt insulated economic policies to protect itself and to take a more aggressive stance against Western views of how it should behave.
Ronald H. Linden is a retired professor of political science and director of European Studies at the University of Pittsburgh.