Global Ramifications:

*This article has been featured in the State of the World publication, Issue No. 01, April 2023

Since it adopted economic reforms and opening in the late 1970s, the People’s Republic of China (hereafter, the PRC or China) has achieved dramatic economic growth, thus transitioning from one of the poorest nations in the world to the second largest economy, which only lags behind the United States. Given its rapid economic development, China has consistently invested a large amount of resources in the military and technology sectors, so the PRC has become a great power that can potentially challenge the global hegemonic status of the United States. In this context, the US Barack Obama administration (2009-2017) launched the Pivot to Asia strategy, later toned down to the Rebalance to Asia policy, to prevent China from flexing its muscle and changing the status quo by force. (1)

Chinese President Xi Jinping (2013-present) perceived US rebalance to Asia as an encirclement strategy, so he discarded Deng Xiaoping’s maxim that China should "keep a low profile and bide its time" (韜光養晦: tao guang yang hui) as its power and influence grows. Instead, based on China’s enhanced power and nationalism, Xi began to pursue more assertive foreign policy, particularly in the issues of Taiwan and South China Sea maritime disputes. (2) In this circumstance, the US government regarded China as a strategic competitor to the US, as viewed in the 2018 US national defense strategy. (3) As time progresses, the US-China rivalry has increasingly spread out to all economic, political, military, technological, and even ideological realms.

Despite the last four decades of tremendous success, however, Chinese economy is currently undergoing a series of significant challenges. First, the Chinese government has tightened its control over private sectors and imposed more regulations, thus dwindling innovation and entrepreneurship in big companies, particularly tech firms such as Baidu, Alibaba, Tencent, and Xiaomi (BATX). (4) The excessive concentration of capital on BATX is contradictory to socialist economic system and harmful to state-orchestrated social order. Second, international business environment has become unfavorable to Chinese companies due to the US-China trade war, America’s decoupling strategy, and European nations’ growing mistrust toward China, particularly after China’s ambivalent stance on Russia’s invasion of Ukraine. (5) Third, a sharp recession in the global economy exerts negative influence on China’s growth as demand from international markets weakens. (6) Fourth, Chinese economy has also suffered from real estate bubble, high unemployment rate of college graduates, and the lack of labor caused by declining population. (7)

Lastly, Xi’s zero-COVID policy has evidently damaged Chinese economy by locking down major cities like Shanghai for mainly political reasons. Xi is reportedly planning to determine his third term rule at the 20^th Party Congress scheduled in mid-October 2022, so COVID should not be a hinderance to his political ambition by destabilizing Chinese society. (8) In 2020, the Chinese government has emphasized the "dual circulation" strategy—both the increase of internal consumption and remaining open to the external trade—to further develop Chinese economy. (9) However, such zero-COVID policy has notably decreased consumption, thereby dampening the dual circulation strategy.

Given all these internal and external risky factors, China could face a serious economic downturn, though not culminating in a hard landing like the Soviet Union in the early 1990s due to its tight control over Chinese society. I think it is highly probable for China to undergo a painful economic adjustment period, as a rapidly rising economic giant Japan went through two decades of low growth after the bursting of its bubble economy in the late 1980s. What impact could China’s economic stagnation have on the international system?

First, China’s economic downturn could further destabilize the already strained global economy. Over the last four decades, China has functioned as a world factory to manufacture numerous consumer and industrial products for global companies, tremendously promoting economic interdependence between China and many other nations. Thus, countries that have cultivated close economic ties with China will have no choice but to suffer from China’s economic recession. For instance, South Korea’s trade volume with China is larger than the sum of its trade with the US and Japan. (10) Thus, China’s economic slowdown, particularly the decline of Chinese consumption, will decrease South Korea’s exports to China while declining the number of Chinese tourists to South Korea. The United States also will not be immune from the negative consequences of China’s economic stagnation. As cheap made-in-China products decrease due to decreasing investment in Chinese economy, American consumers should pay more in purchasing their necessary items. The US government will perhaps have difficulty in financing more based on Chinese investment in US treasury bonds.   

Second, because of China’s economic stagnation, the so-called Beijing model, which emphasizes state-driven economic development, will lose its popularity in the global community. China has not intentionally sought to promote the Beijing model, but China’s rapid economic growth orchestrated by the Chinese government attracted many underdeveloped and developing nations to emulate the Chinese development model. Particularly, more than 100 countries have been attracted to participate in the Belt and Road Initiative (BRI) that Chinese President Xi has vigorously pursued since 2013 as an immense geostrategic, infrastructure-building project. China’s economic slowdown, however, will make it extremely difficult for the Chinese government to continue to push for the BRI because of the nation’s decreased economic resources and the project’s inefficiency. (11) Therefore, the Washington model highlighting deregulation, privatization, and free trade could regain its popularity in the third world countries, especially in Africa and Latin America.

Third, moving beyond such economic impact, China’s economic stagnation will affect the international system at the strategic level. The international system can be either more stable or more volatile depending on how China’s top leaders respond to such economic recession.

Given its rapid economic growth, the Chinese leadership has consistently poured huge number of economic resources onto the elevation of its military capabilities over the last several decades. This pattern, however, could not sustain due to the economic slowdown under which the Chinese government should give a priority to more urgent public needs like the provision of social welfare programs. Thus, the US-China rivalry, which has heightened tension in global politics since Chinese President Xi took power in 2013, would be deescalated if the Chinese leadership retreated from its ambitious goal to be a global hegemon because of its constrained economic resources.

In this scenario, the notable weakening of Chinese power coupled with Russia’s decline promoted by its invasion of Ukraine could shift the balance of power, thus culminating in the reemergence of a unipolarity centered on the US in the international system. The US, relatively less damaged by China’s economic crisis, is likely to maintain its hegemonic status unless Chinese economy rebounds in the short run.

On the other hand, Chinese leaders could take more aggressive actions to stir up nationalism and reinvigorate their ruling legitimacy damaged by economic stagnation. It is a well-known fact that the communist ideology no longer works as a primary source of the Chinese Communist Party (CCP)’s governing legitimacy after China adopted economic reform and opening measures emulating the western capitalist system. Thus, a sharp downturn in Chinese economy will impair CCP’s ruling legitimacy and destabilize Chinese society. To regain the legitimacy and stabilize domestic order, Chinese leaders could take a risk of taking such belligerent acts as an invasion of Taiwan. This military conflict can spark the rally around the flag effect by which the Chinese public give more support to the Chinese government. This alternative scenario will dramatically disrupt the international system, as Russia’s invasion of Ukraine has immensely challenged the rules-based international order.

In conclusion, China’s economic stagnation could add another significant trouble to the international community already fraught with many tough challenges, such as great power competition, Russia’s escalating nuclear threats, economic instability, climate change, and pandemics. Under these circumstances, policy makers in the US and other western countries can be tempted to exploit China’s economic challenges to destroy the authoritarian CCP regime running counter to the rules-based international order. It would be necessary, however, for the US and other nations to help China effectively resolve its stagnant economy for the well-beings of the 1.4 billion Chinese public and other nationals in the global community. This cooperative gesture will be also helpful for China to avoid choosing belligerent policy options such as military actions toward Taiwan.   

References

(1) Kenneth G. Lieberthal, "The American Pivot to Asia," The Brookings Institution, December 21, 2011.  https://www.brookings.edu/articles/the-american-pivot-to-asia/

(2) Masafumi Lida, "Xi Jinping’s diplomacy and the rise of his political authority," Journal of Contemporary East Asian Studies, Vol. 9, No. 2 (2020): 127-143.

(3) "Summary of 2018 National Defense Strategy of the United States of America," US Department of Defense, 2018. https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf   

(4) Joanne Gray and Yi Wang, "China’s big tech problem: even in a state-managed economy, digital companies grow too powerful," The Conversation, July 13, 2022. https://theconversation.com/chinas-big-tech-problem-even-in-a-state-managed-economy-digital-companies-grow-too-powerful-186722

(5) Kevin Rudd, "Rivals within Reason? U.S.-Chinese Competition is Getting Sharper, but Doesn’t Necessarily Have to Get More Dangerous," Foreign Affairs, July 20, 2022. https://www.foreignaffairs.com/china/rivals-within-reason

(6) Laura He, "China’s economy is in bad shape and could stay that way for a while," CNN Business, September 9, 2022. https://www.cnn.com/2022/09/09/economy/china-economy-party-congress-intl-hnk-mic/index.html

(7) Daniel H. Rosen, "The Age of Slow Growth in China and What It Means for America and the Global Economy," Foreign Affairs, April 15, 2022. https://www.foreignaffairs.com/articles/china/2022-04-15/age-slow-growth-china

(8) Michael Schuman, "Zero COVID Has Outlived Its Usefulness. Here’s Why China Is Still Enforcing It," The Atlantic, September 9, 2022. https://www.theatlantic.com/international/archive/2022/09/china-lockdowns-zero-covid-policy/671385/

(9) Jeff Pao, "New urgency for China’s dual circulation drive," Asia Times, April 12, 2022. https://asiatimes.com/2022/04/new-urgency-for-chinas-dual-circulation-drive/

(10) "South Korea’s Foreign Trade in Figures," Santander, September 2022. https://santandertrade.com/en/portal/analyse-markets/south-korea/foreign-trade-in-figures

(11) Jessica Liao, "How BRI Debt Puts China at Risk," The Diplomat, October 27, 2021. https://thediplomat.com/2021/10/how-bri-debt-puts-china-at-risk/