Digest: Winter 2024 Issue 82
Welcome to the China Leadership Monitor's Winter 2024 Digest, which provides article summaries for those who have not yet explored our most recent issue.
Jump to each article summary here:
Patricia Thornton in From “Singing Bright Prospects” to “Traversing History’s 'Garbage Time'”: China Struggles with Slowing Growth
Jeffrey Ding in China's AI Implementation Gap
Paul Cavey in China's Consumption Challenge
Yun Sun in China’s View of Lai Ching-te and the Pending Crisis in the Taiwan Strait
Patricia Thornton:
From “Singing Bright Prospects” to “Traversing History’s 'Garbage Time'”: China Struggles with Slowing Growth
China’s growth has continued to decline, leading to increasing repression, especially in the form of censorship of discourse on the economy and growth statistics, and promotion of alternative narratives. The best example of the current mode of censorship arose during the summer of 2023, when the National Bureau of Statistics stopped publishing youth employment statistics following an embarrassing increase in the youth unemployment rate. At the same time, the regime proclaimed a “new normal of economic development,” linked it to portions of Xi Jinping Thought, and embarked on a drive of “hard propaganda.” These activities, though characteristic of an authoritarian regime in decline, can hurt the regime over time by decreasing support by growingly disaffected citizens, who often manage to haphazardly voice dissent online.
Historical Garbage Time
Following the youth unemployment fiasco in summer 2023, fall of that year witnessed the Chinese Communist Party’s (CCP) failure to announce a date for its Third Plenum, possibly indicating internal struggles to formulate a proper policy response to economic slowdown. In late August, an editor of a Guangzhou paper had posted a piece on WeChat titled “Historical Garbage Time, Culture’s Long Vacation,” which argued garbage time is the beginning of a civilization’s decline and that China had experienced garbage in previous dynasties. The post was soon censored. In November, a Caixin columnist, Xue Qinghe, further popularized the term, proclaiming that China had entered “historical garbage time,” or a “period of history [running] against all economic logic.” Xue contrasted the Guangzhou editor’s argument, positing that historical fate is malleable, not “inevitable,” but still a valuable concept. The ensuing discourse flowered through to 2024, engaging millions of netizens who employed historical and comparative evidence to illustrate a variety of viewpoints on China’s contemporary economic performance; as a result, garbage time has become a key term in China’s cultural lexicon.
Countdown to the Third Plenum
Finally, in April 2024, the regime had begun coordinating a response—of denial. First, it had at last announced the Third Plenum’s dates. Second, Xi Jinping had begun reiterating a counternarrative to Western arguments asserting “peak China” that involved teasing “a series of significant measures of comprehensively deepening reform.” Importantly, this counternarrative never took hold in Chinese discourse. Third, what actually happened locally involved a slurry of news articles and social media posts that directly attacked the idea of garbage time, best characterized by Xinhua journalist Ming Jinwei’s rebuttal, which called the concept an “absurd fantasy.” The entire media establishment, in the leadup to the Third Plenum, had now become a coordinated front against “historical garbage time.”
No true ‘comprehensive’ policy package emerged from the Third Plenum and summer 2024, indicating China is pursuing the status quo on its economic policy while ramping up censorship: any discussion on the Plenum saw extensive restriction. This approach may be backfiring on Xi and the CCP by neglecting to actually dampen discontent, which has remained top of the public mind. Thus, as China continues to deny a path towards structural reform, what Zongyuan Zoe Liu has called “an ‘economic doom loop’” is unfolding in plain sight.
Jeffrey Ding:
China's AI Implementation Gap
Whereas experts often focus on “artificial intelligence (AI) innovation” capacities when measuring leaders in AI, China’s progress should be measured by its “diffusion capacity.” Diffusion capacity refers to the ability of a country to not only innovate, but spread a technological innovation to the fullest extent. While China can certainly compete in the AI innovation race, its inability to reliably diffuse these innovations has created an “AI implementation gap.”
Discussion on China and AI
Top scholars and research bodies have argued that China may leapfrog the US in the AI race: the National Security Commission on Artificial Intelligence argued in a report that China would soon overtake the US due to the sheer number of Chinese academic advancements in AI. Contrasting the Commission’s report, Carl Frey and Michael Osborne have argued that China does not have a superior capability to produce innovation breakthroughs at the American rate. However, these arguments devote too much attention to “leading-edge” AI innovation when analyzing US-China competition. The innovation-focused strategy has even become a key piece of China’s “national AI development plan.”
Diffusion Incapacity?
Because AI is a general purpose technology (GPT), innovations in the field can affect and “transform” almost all practice areas; it is this generalism that shows why AI races should be examined from the perspective of diffusion capacity. GPTs require continual improvement through sustained research to fuel their evolution. Further, as GPTs evolve, they must see an adaptation to established industries, or diffusion, similar to the effect of innovations in electrification, which caused wholesale societal changes through power generation and household appliances, for example. Countries that failed to take advantage of previous waves of diffusion, including in electrification, fell behind, demonstrating the need to focus on diffusion capacity.
The AI Implementation Gap
As China has demonstrated its innovation capacity through the releases of breakthrough large language models, the penetration of the models to industry-specific uses across the Chinese economy remains low. It is important to note that other countries, including the US, continue to struggle with implementation, according to the Reuter Institute for the Study of Journalism. However, China’s potential for diffusion capacity is like low per historical experience, as the country has been slow to implement complex IT and telecommunication innovations on the business-side, shown low digitization rates and its 83rd ranking on the International Telecommunication Union’s ICT (information and communications technology) Development Index. The US ranks 67 places ahead on the Union’s index. ICT, especially cloud-based business infrastructure, may serve as a crucial prerequisite for the diffusion of AI GPT.
With a relatively low implementation rate, China will continue to suffer an AI implementation gap. This gap is only compounded by censorship and restrictive legislation, both of which reduce the potency of large language models and the readiness of the population to use them. Finally, China faces a talent crunch, as the country’s “talent pool of AI practitioners” trails that of the US, indicating Washington will keep the pole position.
China has struggled to produce productivity-driven growth as it seeks an effective long-term growth strategy. If AI is this period’s GPT, China needs the ability to diffuse and implement all the innovations it has and will continue to generate. Current indicators highlight that the country may not have a proper diffusion capacity, a subject experts should pay more attention to when seeking to understand US-China competition.
Paul Cavey:
China's Consumption Challenge
China has seen both sluggish numbers in consumer confidence and retail and a return to pre-Covid trends on other indicators, such as its savings rate. As the CCP charts its future path on the economy, it is clear that these mixed signals can only be properly reprogrammed with structural reform. Instead, the Party has pushed policies meant mostly to combat cyclical economic downturns, such as interest rate cuts and debt relief to provinces, portending further structural decay.
Consumption
Most indicators of consumption fail to capture a holistic picture of China’s economy. For example, as consumer confidence has dipped since the pandemic, household expenditures have, since 2023, returned to an upward trend directly reflecting expenditure growth between 2014 and 2019. However, consumption as a proportion of GDP is still far below competitor states, especially the US, sitting under 40%. Even accounting for government-provided “in-kind benefits” fails to make a dent in China’s relative consumption deficiency: where China defends against cyclical trends, it fails to combat systemic issues.
Savings and Income
At the same time, savings have moderated, with the savings rate decreasing to pre-Covid levels. The proportion of savings going to banks has increased at the expense of property and other investments. This trend is important because it reflects a continuing shift away from what were previously key growth drivers, such as real estate. Further complicating the mixed signals, a decline in home prices accompanying slumping property purchases and investment may decrease wealth for homeowners while increasing the ability for homebuyers to spend, due to cheaper mortgages. Finally, income has not recovered to pre-Covid levels, including among a number of bucketed measurements. For example, property income growth sits at roughly 2%, continuing a decline.
With these mixed signals, it is necessary for China to focus on a long-term fix for its ailing economy. Three solutions stand out: (1) a “Universal Shareholding Scheme for State-owned Enterprise Stocks,” which would allow for the receiving of dividends by households from proxies of the state; (2) greater welfare spending; and (3) government-sponsored “absorption” of vacant real estate. But the most “politically palatable” solutions would involve healthcare- and education-related spending. Yet there is no sign of a shift to consumption-led economic growth, as China has only continued down the path of prioritizing investment.
Yun Sun:
China’s View of Lai Ching-te and the Pending Crisis in the Taiwan Strait
Following a historic third term victory for Taiwan’s Democratic Progressive Party (DPP) and President Lai Ching-te that affirmed the growing antagonism Taiwanese people hold against China, the Chinese Communist Party has sought to establish a “new normal.” This new normal involves signaling stronger punitive measures in case of Taiwanese “transgressions” and the usage of military exercises like the “Joint Sword.” The 2024 Taiwan election and the DPP victory have therefore locked in the further tension along the Taiwan strait, with the potential for peaceful unification seeming all but impossible. Further, Donald Trump’s victory in the US presidential election will likely bring “turbulence” that only multiplies the chances for armed conflict. Thus, 2024 should be seen as the year when cross-strait relations entered a new, likely more tumultuous era.
China’s Views on the Election and Lai’s Speeches
Already before Lai and the DPP’s victory in January 2024, China had deployed an array of “cyber disinformation campaigns and cognitive warfare” to prevent such an unfavorable outcome. Thankfully for China, the DPP had only won 40% of the popular vote, leading to their forming a minority government. Without a majority in the Legislative Yuan, China’s observers fear Lai may rely more on his rhetoric than policy, meaning the possibility of escalation still increases despite the DPPs minority government. Additionally, a return to the 1992 Consensus, a prerequisite for cross-strait contact and talks, is very unlikely. Thus, the presence of a president like Lai is unacceptable to China.
He is seen as “beyond redemption” due to his past experiences and remarks, all of which demonstrate support for Taiwan independence. China does not believe Lai would pursue de jure independence, but does have confidence he will work to strengthen de facto independence. Privately, “Chinese interlocutors” worry about his incendiary and more “inflammatory” style, a sharp contrast to the previous president, Tsai Ing-wen.
This inflammatory style is seen in his speeches, such as his inaugural address. For example, he mostly used Taiwan instead of the Republic of China (ROC) when referring to the island. Chinese officials far prefer the use of ROC as calling the island Taiwan in reference to “the other side of the strait” implies support for “two-state theory.” Lai also never crossed any US “red lines,” such as a constitutional revision or referendum on Taiwan’s status. His careful treading has made his speech something of a dogwhistle: where the international and US audiences saw continuity with former president Tsai, China interpreted openly confrontational stances. This is likely because the Chinese position on Taiwan has become further detached from reality.
Military Responses
Lai’s first two speeches each drew a full-scale army-navy-air-rocket force Chinese military exercise, Joint Sword-2024A and -2024B. These exercises and their swift, comprehensive nature represent that China is reacting to and helping shape a “new order” that may further escalate the cross-strait crisis. These exercises are likely meant to demonstrate Chinese military prowess, erode confidence in Taiwan’s own defense capabilities, and demonstrate that actions unfavorable for China will see swift reaction. Both sides see any precedent as justification for future action along the same lines. For example, Chinese aerial crossings of the Taiwan strait’s median line have become part of the norm, especially since Keith Krach, US Undersecretary of State, visited the island in 2020. On the other hand, the US uses this same logic to “justify” Taiwan presidential transits through the country; if it has happened before, it is okay.
Thus continue the “action-reaction cycles” between China and the US and Taiwan. The likelihood of future conflict is high as China continues to pursue security-related signaling when it perceives transgressions. The arrival of Lai Ching-te to the Taiwan presidency only exacerbates this tenuous relationship just as China witnesses its ailing economy slow. Little incentive remains for a repairing of trust in the cross-strait relationship.
Quarterly digests compiled by Adam Terenyi.
