Reason global economic crisis makes China dangerous

Desperate times call for desperate measures. And despots are always desperate about something.

Desperate times call for desperate measures. And despots are always desperate about something. Which is why a global economic crisis is making China even more dangerous.

“Most debate focuses on the dangers of a rising, confident China. But (there is) a more volatile threat: an insecure China mired in a protracted economic slowdown,” argues Woodrow Wilson International Center fellow Michael Beckley.

China’s economic rise has been startling.

Out of the ruins of Chairman Mao Zedong’s “Great Leap Forward” – which produced the worst famine in history – has emerged a major contender on the global stage. Decades of “opening up” and “letting some get rich first” have produced average annual growth rates of 10 per cent.

But the good times are over.

Long before the global calamity of COVID-19, Chinese economic growth had halved.

Massive debt. Protectionist policies. Resource depletion. Pollution. Corruption. All had taken a toll. Now it faces severely disrupted supply chains, volatile fuel prices and soaring food costs like the rest of the world.

It’s not a scenario that suits Chairman Xi Jinping’s plans.

“Past rising powers that suffered such slowdowns became more repressive at home and aggressive abroad as they struggled to revive their economies and maintain domestic stability and international influence,” Mr Beckley notes. “China already seems to be headed down this ugly path”.

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China's President Xi Jinping. Picture: Mark Schiefelbein / Pool / AFP.

Economic shock

The global pandemic drew attention to the fragility of “just in time” global supply chains. It also revealed how reliant many industries had become on single sources of components, materials, and competence.

President Vladimir Putin’s invasion of Ukraine toppled the apple cart even further. Europe suddenly found the natural gas that drives its residential heating and manufacturing under Moscow’s thumb.

On top of that, Ukraine – which supplies 25 per cent of the world’s grain exports – was suddenly removed from the global food chain.

NATO Secretary-General Jens Stoltenberg warns, “the war in Ukraine demonstrates how economic relations with authoritarian regimes can create vulnerabilities … This is about Russia but also about China.”

The world “should heed those lessons and proactively redefine its economic relationship with another ruthless authoritarian power: China,” says Stanford University geopolitics Adviser Jacob Helberg.

“A Chinese invasion of Taiwan would prompt the same existential questions about the United States’ reliance on Chinese supply chains as Europe’s reliance on Russian energy. The economic chaos would be tremendous; the solutions would be excruciatingly hard to implement in the compressed time frame a crisis would create.”

Like Australia and much of the rest of the Western world, the US relies on Chinese semiconductors, pharmaceuticals, rare-earth minerals and other manufactured goods.

Mr Helberg gives the example of Apple. If it were to suddenly lose its iPhone production lines in China, some two million US employees would be left sitting idle.

“Now imagine that effect spread across multiple large companies,” he warns.

Alternate realities

China’s state-controlled media is full of economic success stories. It’s also heaping praise on Chairman Xi’s strict zero-Covid lockdowns – and President Putin’s “special policing action” in Ukraine.

“Xi said all localities and departments must strive to maintain a stable and healthy economic environment, a stable social environment and a clean political environment,” China’s state-run news service Xinhua proclaims of the Chairman’s Sichuan tour.

“He demanded the full, accurate and comprehensive application of the new development philosophy, and actively serving and integrating into the new development paradigm.”

The fact is, however, that China’s economy is facing severe pressure.

Beijing’s aggressiveness has put it on the brink of losing what it craves: global influence.

Countries like Australia, India, and Japan are joining forces in “like-minded nations” projects such as the Supply Chain Resilience Initiative. Among other things, this offers incentives for their companies to move out of China and back “home” – and secure less politically sensitive supply lines.

Economic strengthening in progress—Thanks to fast recovery of production and logistics, China's foreign #trade registered solid y-o-y growth of 9.6% in May, a strong boost to the aggregate increase of 8.3% over the first 5 months. pic.twitter.com/yER3I5ZDJl

— Zheng Zeguang (@AmbZhengZeguang) June 9, 2022

It’s not just a matter of national prestige. It has real economic implications.

“Slowing growth makes China a less competitive long-term rival to the United States, but a more explosive near-term threat,” Beckley says. “As policymakers determine how to counter China’s repression and aggression, they should recognise that economic insecurity has spurred great power expansion in the past and is driving China’s belligerence today.”

Like Russia and President Putin, China’s future is in the hands of Chairman Xi.

“By the early 2030s, Xi, an obese smoker with a stressful job, will be in his 80s, if he is still alive,” argues American Enterprise Institute analyst Michael Beckley.

By that time, China’s rapidly ageing population will have lost some 70 million working adults and added 130 million retirees.

“Hundreds of billions of dollars in overseas Chinese loans will be due, and many of China’s foreign partners won’t be able to pay them back. It is hard to see how a country facing so many challenges could long sustain its own international order, especially in the face of determined opposition from the world’s wealthiest countries,” he concludes.

Conscious decoupling

“Trade with China is changing the United States more than it is changing China — precisely the opposite of what policymakers promised the world when Beijing was admitted to the World Trade Organisation two decades ago,” Helberg says.

He and other analysts are arguing the economic openness that sought to welcome Communist China into the world community has become a liability.

Beijing is now deeply ensconced in global supply, investment and monetary systems.

“Far from being put out of business by globalisation, China’s authoritarian capitalist system seems almost perfectly designed to milk free markets for mercantilist gain,” says Beckley.

“Beijing uses subsidies and espionage to help its firms dominate global markets and protects its domestic market with nontariff barriers. It censors foreign ideas and companies on its own internet. It freely accesses the global internet to steal intellectual property and spread CCP propaganda.

“It enjoys secure shipping around the globe for its export machine, courtesy of the US Navy. It uses its own military to assert control over large swaths of the East China and South China Seas.”

Whatever the reason, business as usual is no longer an option.

The world economic and political balance has changed.

“The United States can start decoupling deliberately, intelligently, and strategically from China while it still has time to do so — or it can do so reactively, hurriedly, and chaotically once disaster strikes,” Helberg says.

Beckley takes an equally grim view.

“The United States and its allies should focus on selectively undermining Chinese power rather than changing Chinese behaviour. Instead of trying to cajole and persuade Beijing, they should focus on conducting targeted attrition on Chinese capabilities. This approach is obviously risky, but not as risky as business as usual with Beijing.”