Digest: Fall 2024 Issue 81
Welcome to the China Leadership Monitor's Fall 2024 Digest, which provides article summaries for those who have not yet explored our most recent issue.
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Logan Wright in China's Economy Has Peaked. Can Beijing Redefine its Goals?
Minxin Pei in Do Chinese Leaders and Elites Think Their Best Days Are Behind Them?
Ryan Hass in Organizing American Policy Around “Peak China” is a Bad Bet
Zongyuan Zoe Liu in China’s Persistent Global Influence Despite Economic Growth Challenges
Guoguang Wu in Has Xi Jinping Reached His Peak? Power Concentration versus Governance Capability
Logan Wright:
China's Economy Has Peaked. Can Beijing Redefine its Goals?
China plans for a doubling of its gross domestic product (GDP) from 2020 by 2035 to achieve its “socialist modernization”—an unrealistic goal. The country has fudged recent GDP growth figures, indicating China’s economy will leave its period of remarkable growth behind and enter the “garbage time of history.” First, some evidence suggests its economy’s size peaked “as a proportion of the global economy” in 2021. Second, its leaders could react differently and adjust their goal setting and planning for a slowing economy. Third, Beijing could “ease tensions” with its partners and adversaries by admitting its economic slowdown is, in fact, occurring. But it is not just China that miscalculates its options in response to its economic slowdown. The West has “flawed [views] of China’s economic prospects” that constrain officials’ foreign policy choices. Thus, a reassessment is due.
Measuring China’s Economy
China has peaked when using a holistic, relative assessment of its economic performance. While absolute real GDP growth shows China outpaces worldwide growth, it is Beijing’s “importance within the global economy as a whole” that most accurately reflects its having peaked. Other measurements, such as those based on purchasing power parity, obscure analyses of China’s economy. The focus should rest on how China’s growth story has reached a critical juncture regarding its relative share of global GDP, which has grown from 3.6% in 2000 to 18.3% in 2021. It may either mirror the United States’ (US) economy and continue to increase to ~26% of global GDP, or follow Japan’s path of peaking to ~18% and declining thereafter. Much of Chinas’ economic future, therefore, depends on its policy decisions and “capacity,” a function of the exchange rate and its Central Bank’s management of capital flows.
Why Has China Peaked?
China’s economy has peaked for two reasons: first, its slowdown has resulted from ingrained structural problems and, second, “political and financial constraints” limit leaders’ ability for prudent policymaking. China’s slowdown is structural and long-term because of (1) an overreliance on investment-led growth, (2) the use of credit to fuel construction and infrastructure investments, (3) a decline in the ability of the Chinese financial system to “continue financing investment at the same rate,” and (4) the low likelihood that new “sectors” will step in to provide growth opportunities.
This process is illustrated as follows. Infrastructure investments and property construction accounted for roughly a third of the Chinese GDP in 2021. These investments were fueled by “astronomical” financial system growth accompanying a $24 trillion expansion in “new assets . . . from 2008 to 2016.” Because loans have performed so poorly and are often rolled over, it is clear that the country’s gargantuan financial system is broken and cannot extend credit at similar rates. Reversing this structural growth rut requires the redirection of the Chinese financial system to prioritize productivity-led growth, a nigh impossible task. The downstream effects of reducing credit to state-sponsored enterprises and local governments causes renewed issues and further collapses in property investment and prices, for example. However, it is precisely painful reforms like these that China must undergo to reverse its woes.
Fudging the Numbers
China’s reliance on performance legitimacy calls into question the accuracy of its GDP figures, as it may doctor them for legitimation purposes. Figures from 2014 to 2019 and 2022 to 2023 are implausible. From 2014 to 2019, the Chinese economy experienced the “lowest” volatility “in any five-year period for any major economy,” indicating that Beijing “smoothed” its GDP figures. During 2022 and 2023, China likely overstated its growth, especially since Xi Jinping kept much of the country under lockdowns well into 2022. Rhodium group estimates place GDP growth at ranges of -0.3 to -0.8% in 2022 and 1.5 to 2% in 2023, contrasting official figures at 3% for 2022 and 5.2% for 2023. These estimates follow from grave inconsistencies between “official and alternative data” sources. These estimates would indicate that China’s economy has almost certainly peaked as a proportion of global GDP.
Finding Alternative Solutions
China has the choice between two growth models, but each has its own drawbacks and would lead to slower growth rates, ranging between 4-5%. First, Beijing has indicated its interest in pursuing manufacturing-led growth, especially in the “new three” advanced sectors: EVs, solar cells, and lithium-ion batteries. This strategy has severe pitfalls. It relies heavily on increases in global demand for Chinese products, yet much of the West has begun to “de-risk” and place barriers on Chinese products while investing in its own manufacturing. This trend makes it difficult for China to expand its market share in vital economies, just as local demand, such as for autos, is slowing. Second, China has hoped to increase consumption-led growth since 2004, but inequality levels and high savings rates drag consumption growth and its ability to contribute to overall economic growth. Both models are also hampered by China’s inability to cut its investment-led growth kick.
Comparing China
Two comparisons to China’s predicament are possible, though neither is perfect. Japan is an obvious example, as it faced unfavorable demographic trends, the burst of a real estate bubble, and a “liquidity trap.’ This burst caused a “balance sheet recession” that the country resolved only a decade later through its fiscal policy. However, China is the converse of Japan. It has an inhibited fiscal policy but a free hand over its monetary policy. Regardless, it faces similar deflationary risks. South Korea, with its successful focus on advanced manufacturing-led growth, serves as another comparison. Its strategy has resulted in relatively consistent, but slower growth. Further, South Korea similarly struggles to increase consumption and retains a vulnerability to demand for its exports. While neither Japan nor South Korea are perfect comparisons, they highlight the risks China faces ahead; the policy changes China must make, however, are of their own kind.
For China to reform its economic system and escape its systemic rut, it must fully reform its financial system and focus on manufacturing- and/or consumption-led growth or find sources of significant productivity growth. It is possible its leaders fail to comprehend China’s predicament, including the chance that they believe their questionable economic statistics. Yet overall intellectual opinion on China’s economy fails to recognize the mountain China faces. Domestically, Chinese leaders fail to fashion an economy that is compatible with global trends—focusing on export-led growth will simply induce protectionism abroad, for example. Elsewhere, including in the West, public opinion on a peaked China is preeminent, with the misunderstanding causing hawkishness instead of sound policy making. The narrative around China’s economy should reflect reality instead of the West’s fears and China’s hopes.
Minxin Pei:
Do Chinese Leaders and Elites Think Their Best Days Are Behind Them?
China’s economy has likely peaked or is peaking, yet there is little sign the country’s leaders agree. Its GDP relative to the United States (US), in dollar terms, was lower in 2023 than in 2021, for example. An analysis of elite statements and speeches indicates they vehemently deny signs that China’s economy needs reform. Without initiating difficult reforms, however, the favorable factors party leaders cite, such as extensive resources and economies of scale, may not keep China growing at the necessary pace to outcompete the US.
Reacting to the “Peak China” Thesis
It took until 2024 for a measurable domestic reaction to the West’s “peak China” thesis, which originated in 2021. This reaction began with Xi Jinping rebuking the argument and insisting on the Chinese economy’s health and sustainability in a March 2024 meeting with American business leaders. Around this time, the propaganda machine kicked in with a three-pronged strategy. First, outlets have dismissed the “peak China” thesis as “a Western conspiracy” with “ulterior motives.” Second, some messaging has focused on rebuking specific points of the “peak China” argument, including decoupling and “demographic challenges.” Papers like the Economic Daily have featured opinions arguing that China has its own sources of technology innovation and much untapped economic potential that allow it to bypass the risks presented by decoupling and trade hostility. Third, commentaries hold that, accompanying observers’ preferences to “use the nominal exchange rate” measure China’s economic size, the size of the US economy is relatively overestimated while China’s is underestimated.
Explaining Elites’ Economic Optimism
Despite rebutting the “peak China” thesis, Xi Jinping’s report to the 20th National Congress in 2022—as well as other leaders’ speeches—cited some of the same domestic issues the thesis identifies. Notwithstanding this hypocrisy, Chinese leaders fail to comprehend the roadblocks to continued economic performance, such as soaring inequality. Instead, China weighs favorable factors over unfavorable ones. Leaders and reports argue that China has (1) “healthy fundamentals,” namely in its “super sized” economy’s “scale advantage” and ability to successfully implement “dual circulation” through increasing domestic demand; (2) abundant resources and growth potential through the increase in human capital’s offsetting of the threats of an aging population; and (3) robust planning, proven by leaders’ belief that strategies like “dual circulation” have so far been successful.
Justifying Economic Optimism
Some of China’s economic optimism is justified, however. The country has a highly entrepreneurial population, retains a sizable and growing home market, and hypothetically possesses the ability to reform its hukou system and state-owned enterprises. However, its leaders overlook the state’s capacity to actually implement its faulty plans successfully and the threats posed by dual circulation, decoupling, and demographic shifts. For China to succeed, it has to execute plans requiring the coordination of many reforms, including some the government has no interest in undertaking.
Ultimately, “pinpointing” whether China is peaking or has peaked is a futile task. But it is most likely true that China’s rise relative to the US is leveling, and that its leaders vehemently disagree with this proposition. These leaders’ reactions demonstrate much about China’s capacity to adapt to future challenges; their confidence, on the other hand, signals that no matter what, China will be a formidable challenger.
Ryan Hass:
Organizing American Policy Around “Peak China” is a Bad Bet
China faces growing internal and external challenges. However, American policy makers may commit a strategic blunder by misunderstanding the nuances of China’s challenges. Domestically, the country’s growth rate has halved since 2009-12, its stock market has plunged, its youth unemployment rate and old-age dependency ratio continue to grow, and its debt burden has risen significantly. Externally, China’s export-oriented economy faces growing trade backlash, less access to high-end technological inputs and chips, and a hawkish West. Resultantly, scholars like Michael Beckley and Hal Brands have warned that a China in decline may lash out, treating the country as a black box while failing to acknowledge its agency. For the lashing out and “peak China” theses to hold “explanatory value,” China’s leaders must understand that their country has peaked. Yet there is no public sign of this. Elites have continued to stay optimistic about China’s future.
China’s View
Open source research of China’s leaders and their public remarks indicates they have grown more “sober to domestic and external challenges” but feel “confident” of their ability to meet them. This confidence is evident for three reasons.
First, officials, academics, and the media have continued to reframe the challenges China faces within the context of a dextrous, adaptable China. Xi Jinping’s speeches, for example, have repeatedly used the phrase “changes unseen in a century” to describe China’s ascendance vis-à-vis the international system. Over time, his speeches have signaled a growing awareness of the challenges China faces without wavering on the country’s ability to meet them. In addition, the media is often even more optimistic than Xi. Beijing’s increasing role on the world stage, especially economically and diplomatically, provides a significant source of optimism.
Second, China’s scholars, media, and leaders often lump China in with “emerging markets and developing countries,” whose rise they view as “unstoppable.” By linking China’s growth with the rest of the world, they reframe the Chinese ascendance within a wider framework, in effect geographically diversifying their argument ‘portfolio.’ Thus, China frames its rise as part of the growth of the developing world’s influence, something that is assured no matter the predictions for China’s future. Third, to varying extents Chinese leaders believe America is in relative decline at the same time that China is relatively rising. It is from these viewpoints that its leaders have digested and analyzed news of the myriad challenges China faces and, yet, continued to reject the “peak China” thesis.
The Problem with “Peak China”
It is evident Chinese leaders reject “peak China,” but whether they are correct in doing so or not, American policy makers must remain wary of the thesis’ prognosis for several reasons. For one, policy makers could condition themselves to mistake China’s actions for more aggressive ones, inducing “militarized . . . responses” and an “escalatory action-reaction dynamic.” Second, scholars like M. Taylor Fravel warn that China may only ‘lash out’ if its domestic situation worsens concurrently with heightened pressure from its adversaries. Thus, fearing China’s lashing out and resultantly increasing tensions may only help induce the action. Third, framing China as an imminent threat can reduce the scope of action by conditioning public opinion against China and Chinese citizens to “rally behind their leaders.” Finally, “peak China” induces short-term policy making by focusing on China’s contemporary threat at the expense of the long-term needs to maintain symmetry or advantage in the rivalry.
As a result, leaders in the United States (US) should focus on reframing China as a long-term challenge, one that the US must secure its “national performance” for. To maintain its “global leadership position,” the US should prioritize its social, diplomatic, and economic advantages and avoid the pitfalls of the “peak China narrative.”
Zongyuan Zoe Liu:
China’s Persistent Global Influence Despite Economic Growth Challenges
China and its “state-directed capital [have] gone global,” reaping the economic and political-diplomatic benefits in the process. The “peak China” thesis asserts that China has a closing window of opportunity to reshape the world according to its interests, and that, resultantly, it will lash out. Other scholars contend that China has not peaked and will pose a significant challenge to the US long after it has peaked. This significant challenge consists of an expanding global financial-economic presence, as China is now the “second-largest investing country” and a top bilateral creditor with a relatively positive and benign influence, contrary to proponents of the “debt-trap diplomacy” meme. Further, China is globally competitive, with its diplomacy winning votes in the United Nations and industries often outrivaling the West’s.
Why China Has Gone Global
China began to invest globally from a state of “economic backwardness” in 1979, three years after Mao’s death. It shortly expanded “non-trading foreign affiliates” to number in the high hundreds with the hopes of expanding its foreign exchange reserves and exports and gaining access to advanced technology. Following the 1997 Asian financial crisis, Chinese companies have shown a propensity to invest abroad to secure access to competitive advantages and foreign markets; at the same time, the Chinese state has shaped this behavior by encouraging “state-owned financial institutions to allocate assets globally . . . to optimize the management of [its] foreign exchange reserves.”
Shifting production and investment abroad reduces production overcapacity and helps protect China’s long-term interests. The process has occurred through the creation of overseas “economic and trade cooperation zones,” with 112 established by 2022. These zones and factories are often targeted at countries with free trade agreements with the West, helping bypass the effects of decoupling. New factories like BYD’s in Hungary and accompanying increases in Chinese EV market share demonstrate the success of this strategy in action.
China Has Redefined Global Governance
China has developed a new model of “integrated” development assistance whereby it packages overseas development assistance (ODA) together with foreign direct investment. The Belt and Road Initiative integrates further with China’s ODA as it pursues a dual-pronged investment strategy of lending by balancing competing economic and geopolitical interests. Further, China’s lending approach highlights three ways in which it is remolding the global financial system: first, it is lending bilaterally through media like policy banks and state-owned enterprises; second, it is establishing and developing influential multilateral international organizations and fora like BRICS and the Shanghai Cooperation Organization; third, it leads a “development finance institution,” the Asian Infrastructure Investment Bank, which employs “Western finance professionals” from institutions like the World Bank. These three prongs have helped China become one of the largest lenders globally, ensuring the country has a seat at the table when negotiating sovereign debt restructurings and making it a common lender of last resort.
China will remain a persistent global force thanks to its massive overseas investment and lending expansions. Some worries for Western policy makers include threats posed by growing Chinese ownership of overseas assets, especially critical infrastructure, and the use of Chinese financial institutions and lending to avoid sanctions, as occurred following the full-scale Russian invasion of Ukraine. Despite facing strong domestic economic headwinds, China will continue to expand its global economic and financial footprint, including a Renminbi-based dollar alternative. The West will, in turn, respond to these developments by increasing trade barriers and pressure on China. Given its domestic economic issues, this may create a “vicious cycle” for China whereby it prioritizes investments to strategic sectors over badly-needed and painful long-term reforms. The end result of this feedback loop may be stagnation or financial crisis in China. And either of which, compared to past examples of Japan’s stagnation and South Korea’s financial crisis, would have an effect many magnitudes larger due to the country's deep integration in the global economy and highly-developed industrial supply chains.
Guoguang Wu:
Has Xi Jinping Reached His Peak? Power Concentration versus Governance Capability
Xi Jinping has had considerable success in consolidating his power through the skilled manipulation of elite politics. At the same time, however, he has failed to successfully implement his governance program. By playing with elite politics to enhance his power, Xi inherently inhibits his ability to make sound policy. This tug-of-war between power and policy plays out through the medium of “passive resistance” by “regime elites,” paradoxically constricting Xi despite his immense power.
Xi’s Power Consolidation
Two factors show that Xi has successfully consolidated his power: his “dismantling” of established norms within the Chinese Communist Party (CCP), through winning a third term to “rule over the party, state, and military,” and the absence of high-level political opponents following the 20th Party Congress. It is likely Xi is at the peak of political power in China, yet he has had difficulty performing and implementing policy. For example, he has had a middling record on economic performance and difficulty rooting out corruption. Thus a paradox arises: as Xi has climbed to the height of his power, he continues to have a weak record in implementing policy.
Elite Resistance and the Xi Paradox
Xi’s increased power contributes to the “four ‘i’s,” or the idea that political control blocks “information flow from the bottom-up . . . , hinders policy implementation, damages the incentives of the governing elites, and reduces the
system’s initiatives to perform its functions.” Most importantly, a powerful Xi diminishes the individual agency CCP elites have when acting according to their own interests. These “weak” elites then react through incompetence, or “lying down” through subpar or nonperformance of orders and duties. As a group, “weak” and nonperforming elites have become a strong counter to the success of Xi’s policy program, which has struggled to identify and combat “lying down” by emphasizing the “Three Distinguishes” of “positivity, initiative, and creativity” since 2016. Without the earnest aid of these elites, Xi’s policy programmes have suffered in their implementation quality.
Another reason for elite resistance to Xi and his power involves his (unsuccessful) attack on a fundamental CCP institution: corruption. Before Xi, many CCP elites gained power and wealth through their offices’ trappings, “rent-seeking,” and “power-money exchanges.” This corruption, due to its systemic spread, represented an “institutional phenomenon.” By attacking corruption and its threat to the CCP’s ideological legitimacy with numerous campaigns, Xi signals he opposes much of the scope of action cadres had had post-Tiananmen. It is this cat-and-mouse game that ultimately helps limit the effective power he exercises to implement policy.
It is therefore likely that Xi’s power has peaked, and that he will continue experiencing difficulties exercising it well into the future.
Quarterly digests compiled by Adam Terenyi.
