JJust a day after Beijing ended its zero-COVID policy, and immediately following a meeting with leaders from the World Bank and the International Monetary Fund, Li Keqiang, a top Chinese Communist Party official, told reporters that China would welcome foreign investment and Promotion of an institutional opening.
That message was echoed by Chinese Ambassador to the United States Qin Gang in an article titled “How China Views the World” published in National Interest on Dec. 27. Qin assured readers, “China’s development means a stronger force for peace, not a growing power ready to ‘break the status quo,’ as some call it.” The ambassador also warned that “if the people the world from the perspective of ‘democracy vs a common future, then openness, cooperation and win-win outcomes will be the fruits of their choices.’
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This commitment to openness and cooperation stands in stark contrast to what Chinese leader Xi Jinping and his diplomats flaunted a few weeks ago. What would lead to such an abrupt change of position? The answer is simple: China’s economy is in deep trouble.
With China’s GDP coming in at just 3.2% in 2022, well below the projected 5.5%, elite financial institutions are adjusting their forecasts for the Chinese economy. Goldman Sachs has postponed its forecast that China’s GDP will overtake that of the US by 2035. The Japan Center for Economic Research, which previously predicted China would top the world between 2028 and 2033, now says that won’t happen for several decades.
More evidence of China’s bleak economic outlook comes at the Central Economic Work Conference, a meeting summarizing the state of China’s economy and setting priorities for economic efforts in 2023. Prevention and control with economic development is the lack of domestic demand. While domestic demand includes both consumption and investment, China’s challenges stem from low consumption. From 2018 to 2021, China’s consumption percentage of GDP has stalled at about 55%, significantly lower than America’s consumption, which has risen to over 80%.
While Xi’s zero-COVID approach and ongoing fears of contagion have contributed to this drop in consumption, at the heart of the problem is the wealth structure of the Chinese. One of China’s renowned financial think tank platforms, the China Finance 40 Forum, recently released its 2022 Jingshan Report, which revealed that the top 10% of China’s people’s net wealth accounts for 68% of total wealth, while the bottom 50% account for it only 6.3% of total assets. That means half of the country lacks the wealth needed to purchase more than basic necessities, and many lack even that. As Li told a May 28 news conference at the National People’s Congress, China has “600 million people , whose average monthly income is only about 1,000 yuan,” or about $145. Compounding this problem is that Li’s statistics reflect only those who have a steady income and are registered in the government’s system. Many people in rural areas do not have a regular income and are therefore not included in this figure.
With consumption low, China is resorting to an old way to boost GDP: investment. Historically, these investments have focused on infrastructure and real estate development. However, with the real estate sector declining and infrastructure in abundance, China is now shifting the focus of these investments to the high-tech, digital and new energy sectors. This shift will take time and the technology of the West to implement. But the current tenor of West-China relations is likely to lead to embargoes on necessary technologies and an end to foreign capital, which would seriously hamper China’s high-tech development. China also needs the West to sustain its manufacturing exports, a sector that makes real money and generates meaningful returns relative to investments in infrastructure and real estate.
In short, China’s recent economic downturn has left Xi with no choice but to turn back to the export market, a sector that is making real money and making significant gains. Manufacturing exports are the lifeblood of China’s economy, which is why Xi has again signaled his willingness to open the country to the outside world after zero-COVID, despite weak domestic demand.
The question for the US and the rest of the West is whether Xi’s gesture should be welcomed. Some may argue that stabilization of their rule would be possible if the Chinese Communist Party could become more open and tolerant. But I would argue that we need to learn from history and stop associating the CCP’s economic reform and decision to open up with a move towards freedom and democracy. Instead, we must see that this is only an emergency solution in the midst of a crisis. Xi is simply repeating what the CCP was doing long before he took office. That is, when the party faces a crisis from which it cannot extricate itself through construction or property taxes, it makes a gesture of reform and cooperation to enlist Western support in times of need. And when China’s economy or society stabilizes, its position often reverses.
The leaders of the free world have long overlooked the CCP’s main motivations. Even former Presidents Richard Nixon and Ronald Reagan chose instead to focus on the possibility that a partnership with China could help them deal effectively with the Soviet Union. Seeing more opportunities than probabilities, they provided significant assistance to China in many areas, including technology, management, financing, and even defense. This assistance lasted until 1989, when a massive pro-democracy movement took hold in China and the Chinese people demanded real political reforms, which had been touted in the government’s rhetoric. Deng Xiaoping, the CCP leader at the time, responded not by accepting this wish but by suppressing it, leading to the Tiananmen Square massacre.
After Tiananmen Square, China returned to a closed-door state for some time. This led to a rapid decline in the Chinese economy and a renewed crisis in the Chinese Communist Party. Deng was acutely aware of this crisis and knew changes were needed again. Touring southern China in 1992, Deng inculcated a blunt message on his audience: “If China does not practice socialism, proceed with ‘reform and opening-up’ and economic development, improve people’s living standards, then no matter which direction we go , it will be a dead end.”
Once again, Deng’s words hit the nerve of opportunity in the West. President George HW Bush quickly lifted sanctions on China, and President Bill Clinton followed suit, reversing his earlier anti-Communist stance and becoming a key supporter of the engagement policy. The rest is history. China eventually became America’s biggest rival.
There is little difference between Xi and Deng in their motivations and intentions. Their collective intention is to maintain Communist Party rule at all costs. As might be expected, the CCP leaders are unanimous on this point. Despite the random and contradictory nature of reforms in China over the past 40 years, the motivation behind those reforms has been constant: to secure Communist Party rule. Although the party leadership appears to be courting Western connections, we must look at China’s social and economic context and recognize that these talks are born out of necessity and crisis. Once China’s economy improves and Communist Party rule is restored, this approach is likely to change abruptly.
We should not allow our American idealism and hope that China will become democratic as it engages in the global economy to overtake our understanding of the country’s historic realignments for its own benefit. China is now experiencing another moment of crisis, the third in 40 years. Perhaps it’s a bigger potential crisis than the one Deng faces because it’s a time when an emerging economy’s growth dividend, namely the population and urbanization dividend, is disappearing and China’s structural imbalances persist.
Should the West offer its help again? The answer is no. Let China use its own resources and funding to restructure the nation, and let the quality and strength of our respective institutions determine America’s and China’s positions in the world.
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Simone Gao is a Chinese-born, award-winning journalist and the producer and host of Zooming In, an in-depth current affairs reporting program.
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