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President Xi Jinping wants to portray China as a powerful trading partner – or dangerous adversary – for virtually any country that wants to thrive in the 21st century.
“The Rise of the East and the Decline of the West” is his motto. As Chinese growth soared and Western politicians pondered how to respond, it also became a nationwide buzzword.
But among the Chinese people – and increasingly in Europe’s law firms and boardrooms – a different story is beginning to be told: Beijing’s march toward global economic dominance may not be invincible after all.
China managed only weak GDP growth after belatedly freeing itself from pandemic restrictions. The real estate market is in crisis and youth unemployment has risen to dangerous levels, estimated at 50 percent. Private entrepreneurs are increasingly afraid of what the state will do to their businesses, and consumers have stopped spending like they did in the pre-COVID good times.
In Shanghai, London and New York, Chinese and foreign companies alike are now grappling with a new scenario: What if the downturn continues?
“The risks of a major economic crisis in China or, perhaps even more likely, impending stagnation in sustained economic growth are there.” […] rising,” Jacob Kirkegaard, senior fellow at the Peterson Institute For International Economics, told POLITICO.
What is happening to China’s economy is of enormous importance to the world.
According to the latest statistics, the Chinese economy grew only slowly in the second quarter of this year. In April and June, GDP increased by a seasonally adjusted 0.8 percent compared to the previous quarter. Year-on-year, second-quarter GDP grew 6.3 percent, below forecast of 7.3 percent.
Those numbers are still far healthier than most Western economies can boast.
But the uncertain outlook is fueling doubts about how Beijing will approach the West. At this point, it’s unclear whether Xi will show a friendlier face or whether, instead, tougher economic times will embolden Communist Party hardliners to seek points of conflict with the US or Europe to distract public opinion and bolster nationalist sentiments.
President Xi Jinping wants to portray China as a powerful trading partner – or dangerous adversary – for virtually any country that wants to thrive in the 21st century | Pool photo by Leah Millis via AFP/Getty Images
Even the leaders of the Communist Party do not hide their problem. At their annual Politburo meeting before the summer, which sets the tone for economic work for the rest of the year, party officials concluded that the economy “faces new difficulties and challenges, primarily due to insufficient domestic demand and difficulties in functioning “Few companies, many risks and hidden dangers in key areas, and a grim and complex external environment,” state-run Xinhua News Agency quoted the Politburo as saying.
Exit
In both Europe and the US, governments are radically reassessing their own economic vulnerabilities. Russia’s invasion of Ukraine shocked EU governments, prompting them to reconsider their reliance on supply chains controlled by potentially unfriendly regimes.
Europe has largely decoupled itself from Russian fossil fuel imports, but remains dependent on China for critical raw materials that make up battery components that will be crucial to, among other things, the green energy transition.
Western leaders, from EU leader Ursula von der Leyen to US President Joe Biden, now routinely speak of economic “de-risking” with China. Even Olaf Scholz, who is traditionally regarded as Europe’s leading dove when it comes to China politics, has become aware of the danger of too close a connection to the Chinese economy.
Behind closed doors at the October European Council summit last year, Scholz expressed his concerns about China’s prospects. Shortly before his first trip as German head of state to Beijing, he told his EU counterparts that “a massive financial crisis” could be triggered if Beijing couldn’t deal with its housing crisis, according to two diplomats briefed on the call who were granted anonymity.
Italy’s new Prime Minister Giorgia Meloni is preparing to step out of a deal under which Rome has committed to becoming part of Xi’s global infrastructure plan, the Belt and Road Initiative. And the government of French President Emmanuel Macron has taken a more critical stance on Beijing in recent weeks, particularly on its stance on Ukraine.
Against this backdrop, the Beijing government is now focused on a less chilly approach to the West, even when it comes to its arch-rival in Washington. Several US 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 visit later this summer. An EU-China summit is also in the pipeline, said a diplomat, speaking anonymously, as plans are ongoing.
Beijing is also interested in placating private companies in China, but it doesn’t seem to be working.
“What we saw was actually a decline in the overall level of trust” among 570 EU companies operating in China that 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 about where China stands, particularly in relation to the Chinese economy,” said Eskelund, whose chamber represents 1,700 mostly European companies and entities in China.
Xi has always shown a preference for the state sector. His most radical moves against the private sector have been aimed at tech giants, although they are widely regarded as China’s best hope of competing with the West. Under Xi’s oversight, the Chinese bureaucracy has cracked down on Jack Ma, the billionaire founder of multinational e-commerce platform Alibaba, restricted the development of online games and private tutorial courses, and heavily regulated data even for foreign companies.
Some Western companies are already looking elsewhere. According to Eskelund, the head of the EU chamber, 11 percent of the companies surveyed last year said they were considering leaving China. This year, exactly the same proportion of companies said they had already made the decision to exit.
“If you’re in an economy that’s growing at 10 percent a year, that’s good for everyone,” Eskelund said. “If you slow down to 5 percent, 5.5 percent, then there are going to be sectors of the economy that aren’t growing like they were before.”
Xi has attained enormous personal power at the top of China’s political system. Whether Xi-conomics works out in the end will depend to a large extent on him.
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