Daniel Rosen and Logan Wright
The need to take a more hawkish approach toward China is one of the only issues that commands bipartisan agreement in Washington. Lately, the growing evidence of a sharp slowdown in China’s economy has opened up new lines of debate. Although there have long been signs that China is entering an age of slower growth, Washington did not expect the extent of this slowdown, and both parties and the policy community are scrambling to decide what to make of it, why it happened, and what to do about it.
The changes in China’s economic performance, which for decades seemed immune from the business cycles and growth constraints that apply to the rest of the world, have certainly been profound. From 1980 to 2019, China reported economic growth at a rate that was on average three times faster than the United States’. But since 2021, that outperformance has slowed. According to China’s official numbers, its growth rate barely surpassed that of the United States in 2022, at three percent to 2.1 percent. These numbers are suspect, however: the impact of COVID-19 restrictions on both consumption and investment, and the deep contraction of the property sector, mean that real economic growth in China was almost certainly negative in 2022. This year, growth in household consumption in China has been limited, investment has been flat, government spending has been limited by debt servicing costs, and net exports have contracted. Real economic growth in China in 2023 is likely below two percent, which is far short of the officially reported 5.2 percent in the first three quarters. Medium-term accounting forecasts now have China in the three percent range from the medium term onward, with the United States expected to achieve average growth of around two percent, according to the nonpartisan Congressional Budget Office. China’s exchange rate is likely to depreciate because of persistent capital outflows, further reducing China’s share of the global economy in U.S. dollar terms. Since the U.S. economy is about $10 trillion larger than China’s at present, the United States will likely contribute more to global growth than China over the next two decades.
Over the past decade, hostility has built between Washington and Beijing on several issues including unfair trade, intellectual property theft, the COVID-19 pandemic, and Chinese support for Russia’s invasion of Ukraine. It is unsurprising, then, that leaders in Washington are beginning to ask how China’s current economic straits can be exploited to U.S. advantage. For instance, in August, responding to congressional testimony advocating a measured U.S. response to China’s current economic travails, former U.S. Assistant Secretary of Defense for Indo-Pacific Security Affairs Randall Schriver joined the chorus of voices in Washington that are speculating how to “kick them [the Chinese leadership] while they’re down, if you will, to put pressure on them based on the experiences they are now having.”
The Biden administration insists that although it has introduced restrictions on some aspects of U.S.-Chinese trade, it is seeking only to build a high fence around a small yard—that any economic decoupling will be limited to areas that concern national security. But faith in that commitment to limited restrictions is fragile, not only in China but also among U.S. allies and partners as well. If Washington goes beyond these limited controls on high-technology trade and investment with China to prohibit broader categories of financial, trade and technology flows indiscriminately—it will present Beijing with the ideal scapegoat for its homegrown economic problems. It will also increase the likelihood of conflict by reinforcing Beijing’s narrative that Washington is hell-bent on limiting China’s rise, or “rejuvenation,” as Chinese President Xi Jinping puts it. Rather than volunteer to take the blame for China’s malaise by announcing unnecessary decoupling policies, Washington should downplay its own role and demonstrate that it is not responsible for China’s present stagnation. Instead of kicking China while it is down, U.S. leaders should hold Beijing accountable for the predictable consequences of its policies and make good-faith efforts to give the Chinese leadership economic advice and opportunities for cooperation.
THE BLAME GAME
The prevailing 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 challenged by the perceived success of China’s autocratic state capitalism, particularly since the global financial crisis of 2008–10. As the Chinese economy experienced rapid growth over the past decade, the ultimate success of Beijing’s model seemed almost inevitable. Now that it has faltered, it is strategically crucial that Washington does not receive the blame.
The political attempt to drive China’s “rejuvenation” produced an overzealous pursuit of economic growth based on unsustainable foundations. China’s slowdown is the result of a decade of overinvestment in property and infrastructure, financed by loading debt onto households and local government entities. To maintain the appearance of official fiscal prudence, Beijing limits localities’ ability to issue debt. But to achieve world-beating GDP growth at the same time, authorities let nominally private local government financing vehicles do the borrowing instead, keeping liabilities off the state’s books. After years of unsustainable property booms and rising local debt, these entities are unable to handle their obligations. Engines of growth have become engines of distress.
Historians will debate how imprudent this growth model was, but they should not be distracted by the erroneous idea that things were going well in China until the United States blocked investment flows. In fact, corporate direct investment in China and portfolio investment flows have been slowing since 2021 because of concerns about market conditions, not U.S. targeted investment restrictions. Data from China’s own State Administration of Foreign Exchange show that in the third quarter of 2023, foreign direct investment was negative for the first time since the 1980s. The primary driver of China’s economic slowdown has been the end of the property and infrastructure bubble, and that is a purely domestic phenomenon. Private Chinese business investment is declining because market opportunities are drying up for want of needed reforms; consequently, returns on investment in the rest of the world (including the United States) are now higher than they are in China.
Washington must strive to convince the world that China’s current economic challenges are of its own making—the product of excess state intervention and insufficient marketization—rather than inadvertently promote the notion that the United States is responsible. China’s leaders need to understand this, too: the prosperity of 1.4 billion people depends on it. Moreover, nations of the global South contemplating the introduction of some elements of the Chinese development model urgently need to realize why China’s economy is slowing and what the consequences of following its example would be.
NOTHING TO FEAR
The United States no longer faces a growth challenge from China, which now has an economy around 62 percent of the size of America’s. Marginal adjustments in global economic share between the United States and China will not be significant in any of the security-, trade-, or innovation-related areas in which the two countries compete. The Chinese leadership is going to need to make its own hard choices about which strategic priorities to support in the future as the country’s resources decline. Beijing is likely to end up ceding ground to Washington as a result.
There is little for the United States to gain from blocking economic and financial transactions with Beijing in most consumer-facing businesses and areas of portfolio investment. By gratuitously restricting trade with China in low-stakes areas, Washington will only create tensions with its allies and partners. The European Union, Japan, and other aligned countries do not view the balance of economic and security threats from China in the same way the United States does, and a needlessly restrictive U.S. stance will strain relations with them. Political capital is finite, and Washington should invest it in ways that strengthen these partnerships. Without an alignment on restrictions, other countries will simply provide China with the products and technologies that it needs and previously acquired from the United States.
The countries that Beijing is working to influence—particularly those in the global South, many of which have received loans and project financing from China in recent years—will be carefully watching what Washington does. These countries are still ambivalent about Beijing’s economic model and are already struggling to manage the debts they have incurred to Chinese creditors. Pointing out the potential costs of alignment with Beijing, and the limited assistance its economic model can provide, will be ineffective as long as Beijing can blame the United States for its economic pain and that of its friends. If the United States made clear that the responsibility lay elsewhere, while offering financial assistance to indebted economies, it would provide a powerful contrast with Beijing’s ongoing intransigence in debt negotiations.
SPREADING THE WORD
Washington’s challenge is twofold. First, it must determine how it should talk about the Chinese slowdown and make clear that the fault is Beijing’s. Second, Washington must prepare to mitigate the negative consequences that the Chinese slump will have for the U.S. economy as well as for vulnerable countries, especially in the developing world. Only after these important steps have been taken should U.S. leaders consider whether there is a responsible way to profit from China’s economic stress.
Washington must set the agenda for responding to China’s slowdown. A central message should be the importance of transparency. Failure to emphasize accurate and transparent economic data and the free flow of commercial information is a major cause of China’s economic troubles. U.S. officials must make the case for transparency in private consultations with Chinese counterparts—including at this week’s meeting of Asia-Pacific Economic Cooperation leaders in San Francisco, which both Xi and U.S. President Joe Biden will attend—as well as in public. In meetings of the G-7 and the Organization for Economic Cooperation and Development, Washington should also offer analysis of the causes, extent, and spillover implications of a slowing Chinese economy. This could facilitate efforts by these organizations to offer assistance to China and other affected countries. Likewise, U.S. officials should present their analysis to leaders of multilateral organizations—especially the International Monetary Fund, the World Bank, and the World Trade Organization—who are strong voices in economic debates but have to date publicly taken Chinese assurances of steady growth at face value.
Washington has extensive experience dealing with the sort of structural economic problems that China now confronts. It did so at home in coming to terms with stagflation in the 1970s, the savings and loan crisis in the 1980s, the property bubble feeding into the global financial crisis in the first decade of the twenty-first century, and myriad other painful but necessary adjustments. Washington has also worked constructively with other major economies to manage the risks of global contagion, successfully doing so, for example, in the Asian financial crisis in the late 1990s and Latin American debt crises in the 1980s. Washington should make clear to China that it takes no pleasure in its economic slowdown and stands ready to provide its technical expertise. Although Beijing may well decline such an offer, that should not be presumed, and in any case, it will be symbolically important for other countries to see that it is made.
Finally, faltering growth has already diminished China’s once generous international development spending. It now seems likely that Beijing is receiving more money in repayments than it is sending abroad. China’s slowdown will also mean reduced export opportunities for many developing nations. This presents an opportunity for Washington—after years of talking about better development assistance programs to match Beijing—to pull ahead with higher quality offerings. It may be that the combination of U.S. trade, investment and experience of avoiding debt pitfalls will even be sufficient to enable Washington to take over half-built Belt and Road Initiative projects facing default risks because of China’s slowdown and reluctance to extend debt relief.
Regardless of Washington’s messaging, Beijing will continue to argue that the United States fears China’s rise and is focused solely on limiting China’s economic achievements in service of containment. But if Washington can avoid taking the blame for Beijing’s economic malaise and promote a deeper understanding of its causes, China’s argument will be less compelling in Europe, the Middle East, and Southeast Asia, and its strategic and diplomatic options far more limited. Moreover, the U.S. argument will only become more convincing if the Chinese authorities’ missteps on economic policy continue. Controlling the global narrative about China’s economic slowdown may not change Beijing’s behavior, but China’s international influence—which rests primarily on a record of economic expansion—will wane.
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