The need for a tougher approach to China is one of the only issues that a bipartisan agreement in Washington demands. Lately, the symptoms of a sharp slowdown in the Chinese economy have opened up new avenues for debate. While there have been long-standing symptoms of China entering an era of slower growth, Washington did not expect the magnitude of the slowdown, and both parties and the political network are debating what to do about it, why it happened, and what to do about it.
The adjustments in the economic performance of China, which for decades seemed immune to the economic cycles and expansion restrictions that apply to the rest of the world, have certainly been profound. From 1980 to 2019, China recorded economic expansion at a rate on average three times faster than that of the United States. But since 2021, this outperformance has slowed. According to official figures from China, its expansion rate slightly exceeded that of the United States in 2022, between 3% and 2. 1%. However, these figures are suspect: the effect of COVID-19 restrictions on entry and investment, as well as the sharp contraction in the real estate sector, mean that the true economic expansion in China has almost in fact been negative in 2022. year, the expansion of the number of households in China was limited, investment remained stable, public spending was limited by debt service costs, and net exports contracted. China’s actual economic expansion in 2023 will likely be less than 2%, well below the 5. 2% officially announced for the first three quarters. Medium-term accounting forecasts now put China at a 3% range in the medium term, while the United States is expected to see an average expansion of around 2%, according to the nonpartisan Congressional Budget Office. China’s exchange rate will most likely depreciate due to capital continuity. capital outflows, further cutting China’s share of the global economy in US dollar terms. Given that the U. S. economy is currently about $10 trillion larger than China’s, the United States will most likely contribute more to global expansion than China over the next two decades.
Over the past decade, hostility has evolved between Washington and Beijing over various issues, adding unfair trade, theft of intellectual assets, the COVID-19 pandemic, and Russia’s Chinese invasion of Ukraine. It’s not surprising, then, that leaders in Washington are beginning to question how China’s existing economic problems can be exploited to the benefit of the United States. For example, in August, responding to congressional testimony advocating a measured U. S. reaction to China’s existing economic woes, former U. S. Undersecretary of Defense for the Indo-Pacific Randall Schriver of Security Affairs joined the chorus of voices in Washington speculating about how to “drive them out. “
The Biden administration insists that while it has imposed restrictions on some facets of the industry between the United States and China, it is only seeking to build a top fence around a small backyard, and that any economic decoupling will be limited to spaces that fear the National security. But confidence in this commitment to imposing restrained restrictions is fragile, not only in China but also among America’s allies and partners. If Washington goes beyond those restricted controls on high-tech industry and investment with China and indiscriminately bans broader categories of financial, industrial and generation flows, it will make Beijing the ideal scapegoat for its economic woes. internal. It will also increase the likelihood of a clash by reinforcing Beijing’s narrative that Washington is determined to restrain China’s rise, or its “rejuvenation,” as Chinese President Xi Jinping puts it. Rather than volunteering to take responsibility for China’s malaise by pronouncing unnecessary decoupling policies, Washington deserves to downplay its own role and demonstrate that it is not to blame for China’s current stalemate. Instead of hitting China when it is in trouble, American leaders deserve to hold Beijing accountable for the foreseeable consequences of its policies and make good faith efforts to offer Chinese leaders economic recommendations and opportunities for cooperation.
The current understanding of the direction of the Chinese economy and the reasons for its slowdown is of great importance to the United States and its allies and partners. The merits of market liberalism – which were almost universally appreciated at the end of the Cold War – have been called into question by the perceived good fortune of China’s autocratic state capitalism, especially since the global currency crisis of 2008-2010. While China’s economy has grown over the past decade, the ultimate Beijing-style good luck seemed almost inevitable. It is strategically very important that Washington is not blamed.
The political attempt to push China’s “rejuvenation” has resulted in an overzealous pursuit of economic expansion based on unsustainable foundations. China’s slowdown is the result of a decade of overinvestment in real estate and infrastructure, financed through the borrowing of households and local government entities. To maintain the appearance of official fiscal prudence, Beijing is restricting localities’ ability to factor in debt. But in order to achieve record GDP expansion globally at the same time, the government allowed theoretically personal local government financing vehicles to borrow instead. , thus preventing debts from being recorded in the State’s books. After years of unsustainable real estate booms and developing local debt, these entities are unable to meet their obligations. Expansion engines have distress engines.
Historians will debate the recklessness of this expansion model, but they won’t be distracted by the misconception that things were going well in China until the U. S. blocked investment flows. In fact, direct business investment in China and portfolio investment flows have been slowing since 2021 due to considerations about market conditions, not specific restrictions on investment in the United States. Data from China’s National Administration of Foreign Exchange shows that in the third quarter of 2023, foreign direct investment was negative for the first time since the 1980s. One of the consequences of China’s economic slowdown has been the end of the housing and infrastructure bubble, and this is a purely domestic phenomenon. Investment through Chinese private companies is declining because market opportunities are drying up due to the lack of mandatory reforms; therefore, returns on investment in the rest of the world (including the United States) are now higher than those in China.
Washington will have to strive to convince the world that China’s demanding economic situations are of its own making—the product of exaggerated state intervention and inadequate commodification—rather than inadvertently peddling the concept that the United States is responsible. China’s leaders want to understand this, too: the prosperity of 1. 4 billion people depends on it. In addition, countries in the Global South that are considering introducing elements of China’s style of progress urgently need to understand why China’s economy is slowing down and what the consequences would be if they were to follow this path. their example.
The U. S. no longer faces the expansion challenge of China, whose economy is now about 62% the length of the U. S. Marginal changes in the overall economic share between the U. S. and China will not be significant in any of the areas of security, trade, or innovation. related spaces in which the two countries compete. China’s leaders will have to make their own difficult choices about which long-term strategic priorities as the country’s resources dwindle. Beijing will probably eventually cede the floor to Washington.
The U. S. has little to gain by blocking economic and monetary transactions with Beijing in consumer-facing portfolio investment spaces and corporations. By restricting industry with China in low-risk spaces for free, Washington will only create tensions with its allies and partners. The European Union, Japan, and other aligned countries do not understand the balance of economic and security threats emanating from China in the same way that the United States does, and an unnecessarily restrictive stance across the United States will strain your relations with them. Without alignment on restrictions, other countries will simply supply China with the products and technologies it desires and have acquired from the United States in the past.
The countries Beijing seeks to influence (especially those in the Global South, many of which have secured loans and funding from China’s allocations in recent years) will be watching what Washington does. These countries remain ambivalent about Beijing’s economic style and are already struggling to manage the debts they have incurred with their Chinese creditors. Pointing out the possible prices of aligning itself with Beijing and how limited its economic style can offer will be futile as long as Beijing can blame the United States for its economic problems and those of its friends. If the U. S. were to make clear that the duty lies elsewhere, while providing monetary aid to indebted economies, it would be in stark contrast to Beijing’s continued intransigence in debt negotiations.
Washington’s challenge is twofold. First, you want to figure out how to communicate China’s slowdown and make it transparent that Beijing is to blame. Second, Washington will have to prepare to mitigate the negative consequences that the Chinese crisis will have on both the U. S. economy and the U. S. economy. vulnerable countries, especially in the emerging world. Only after those vital steps have been taken can U. S. leaders ask themselves whether there is a culpable way to take credit for economic tensions in China.
Washington will have to outline the reaction program to China’s slowdown. A central message deserves to be the importance of transparency. The lack of emphasis on accurate and transparent economic knowledge and the loss of trade data are one of the main causes of China’s economic problems. US officials are expected to advocate for transparency in face-to-face consultations with their Chinese counterparts, they added at this week’s Asia-Pacific Economic Cooperation Forum leaders’ assembly in San Francisco, which will be attended by Xi and US President Joe Biden-, as well as in public. . During the G7 and Organization for Economic Cooperation and Development assemblies, Washington also deserves to offer an investigation into the causes, scale and consequences of the slowdown in the Chinese economy. This may simply facilitate the efforts of those organizations to offer assistance to China and other affected countries. Likewise, U. S. officials deserve to offer their research to the leaders of multilateral organizations (namely the International Monetary Fund, the World Bank, and the World Trade Organization), which are strong voices in economic debates but have so far publicly accepted Chinese guarantees of stable expansion in the face of the situation. worth.
Washington has a wealth of experience in addressing the kind of structural economic turmoil that China faces today. It did so internally by tackling stagflation in the 1970s, the savings and credit crisis in the 1980s, the housing bubble that fueled the global currency crisis of the first decade of the 21st century, and a myriad of other painful but obligatory upheavals. Washington has also worked constructively with other primary economies to manage global contagion risks, such as the Asian currency crisis of the late 1990s and the Latin American debt crises of the 1980s. Washington deserves to make it clear to China that it needs to be unenthusiastic about its economic slowdown and is in a position to bring in its technical expertise. Even if Beijing could simply reject such an offer, this should not be taken for granted and, in any case, it will be symbolically vital. so that other countries can see that it is done.
Finally, the slowdown in expansion has already reduced China’s once-generous spending on foreign progress. It is now very likely that Beijing will get more money in refunds than it sends abroad. China’s slowdown will also lead to fewer export opportunities for many emerging countries. This represents an opportunity for Washington – after years of discussions about more progressive aid systems to accommodate Beijing’s – to press ahead with higher-quality offerings. It could be that the combination of U. S. trade, investment, and expertise in avoiding debt traps would even be enough to allow Washington to resume half-built Belt and Road Initiative projects, which face risks of default due to China’s slowdown and its reluctance to expand debt relief.
Regardless of Washington’s message, Beijing will continue to argue that the United States fears China’s rise and its sole goal is to constrain China’s economic achievements in the service of containment. But if Washington succeeds in avoiding taking responsibility for Beijing’s economic malaise and promoting a greater understanding of its economic malaise, China’s argument will be less convincing in Europe, the Middle East, and Southeast Asia, and its strategic and diplomatic features will be much more limited. Moreover, the U. S. argument will only become more convincing if the Chinese authorities’ economic policy mistakes continue. The global narrative about China’s economic slowdown may not replace Beijing’s behavior, but China’s foreign influence, which is primarily based on a history of economic expansion, will wane.