In China’s current economic travails, US and other G7 nations increasingly see evidence of deep-seated structural problems that ultimately would strengthen the West’s hand against a weakening geopolitical competitor.
The view emerging from officials in Washington, Rome, Tokyo and other capitals, who spoke with Bloomberg News mostly on condition of anonymity in recent days, is that the dominant economic narrative that has guided the flows of capital around the globe for decades is flipping fast.
If China once seemed on an inevitable path to overtaking a declining US as the world’s leading economic power, that is no longer the case. The calculations in Washington and beyond are increasingly about how to deal with a China that, even if it is not yet in absolute decline, might well be approaching a peak in power.
Illustration: Yusha
US President Joe Biden betrayed that growing sentiment at a campaign event earlier this summer when he called China’s economy a “ticking time bomb” because of long-term challenges from debt to demographics. Aboard a high-speed train from Beijing to Shanghai on Tuesday last week, US Commerce Secretary Gina Raimondo said US companies had told her China had become increasingly “uninvestible.”
“The conventional wisdom seems to be flipping from a concern with the unstoppable rise of Chinese power to a worry about the irrevocable decline of China’s economy and population,” said Richard Fontaine, chief executive officer of the Center for a New American Security in Washington.
It is a view that has been quietly growing within the Biden administration. In an interview with Bloomberg News in June on the eve of a trip to Beijing, US Treasury Secretary Janet Yellen called China’s now-declining population “a challenge in terms of growth and investment” and pointed to other problems like soaring youth unemployment and a collapsing real-estate sector that once made up about a quarter of aggregate demand.
US officials think China has made a mistake by ignoring decades of advice to open its economy more, and while they argue it is too early to say China is peaking or has peaked, they see longer run issues as a brake on growth. Echoing Raimondo’s argument, US Deputy Treasury Secretary Wally Adeyemo said last week: “The Chinese are creating a less favorable environment for foreign direct investment and foreign companies.”
Officials across the G7 are also contemplating just how the US$18 trillion economy’s woes would hit their own markets. Some worry about the knock to an already shaky outlook if the world’s foremost growth driver falters further. In London, some see the silver lining of a disinflationary impulse that would aid their efforts to tame prices. The shift in sentiment goes beyond officialdom.
The latest issue of Foreign Affairs magazine, the intellectual bible of the US foreign policy establishment, reads like a requiem for a rising China with articles declaring the end of its growth miracle and the start of an era of stasis.
At an Aug. 21 hearing of the US-China Economic and Security Review Commission — a bipartisan panel that has long been a venue for warnings about the consequences of China’s rise — the dominant theme relayed by private sector analysts was economic vulnerability.
“Beijing will never be able to make a credible claim to global economic primacy,” Logan Wright, head of China markets research at the Rhodium Group consultancy, testified.
Just how enduring China’s slowdown would be is unclear. China has the financial resources to stimulate its economy and avoid an economic collapse, G7 officials point out. While Beijing has been rolling out measures to support its ailing property industry almost daily, it has so far refrained from all-out stimulus as Chinese President Xi Jinping (習近平) and his economic officials seek to break the nation’s addiction to unsustainable debt.
The fiscal strains involved in any widespread effort to bolster the property sector and juice growth would make it tougher for China to balance other priorities. Gerard DiPippo, senior geo-economics analyst for Bloomberg Economics, said the troubles would not preclude China from paying for its industrial policies, “but probably will make those policies less effective.”
There are also growing doubts about what was once considered certain: China’s economy one day overtaking the US as the world’s largest. Aided by a stronger greenback, the US economy has recently managed to open a bigger gap over China, Bloomberg Economics analysis shows, and that is a trend that seems likely to continue.
“Success can be self-reinforcing,” DiPippo wrote in a report last month.
Still, US, European and Japanese officials insist there is no reason for triumphalism as they face their own challenges and fret about the impact of weaker Chinese demand on the global economy and their own companies.
There are signs that the shift in sentiment is also starting to impact Western policy, even if officials insist they do not yet see a need to shift course. When the Biden administration unveiled much-anticipated limits on outbound investment in last month, they turned out to be relatively weak and narrowly focused. That was partly a result of lobbying by US investors.
The roll out was also deliberately subdued in part because, one administration official said privately, the White House saw China’s own increasingly hostile policies and its economic strains doing a better job discouraging investment than any US restrictions could hope to achieve.
Officials in Washington and European capitals insist that China’s slowdown is a validation of their post-COVID-19 pandemic efforts to reduce dependence on the export powerhouse and re-examine their own trade, investment and industrial policies. While the US has led that “de-risking” drive, it has found common cause in the G7.
The officials also say that China remains a formidable challenge in many strategic sectors and is likely to be so for many years to come. That means they would press ahead to buttress alternative supply chains with their own beefed-up industrial policies.
“Two things are true,” said Jennifer Harris, who until earlier this year served on the US National Security Council and has for years been an advocate of more muscular US trade and industrial policies.
The first is that “China will get old before it gets rich,” Harris said.
However, that takes little away from the equally important second factor: “the potency of Beijing’s industrial policy efforts trained at certain strategic industries” like electric vehicles.
Other thinkers both inside and outside the government in Washington see China’s slowdown as a consequence of Beijing’s reluctance to undertake major reforms and reduce the importance of the state sector.
“We’re seeing an optimistic America and frankly a China that’s confronted with, again, a whole barrage of economic problems hitting them in all different directions,” said Wendy Cutler, a former long-serving senior US trade negotiator and now vice-president at the Asia Society Policy Institute. “That said, the US should not be beating its chest here. This may weaken the competition, but China is a formidable economic rival.”
Indeed, China continues to deepen links with economies in the Global South, with the list of nations interested in joining the BRICS grouping the latest illustration of its swelling influence among emerging markets. Yet China’s pitch for its authoritarian model has long been built on its own economic rise and growth. That model now looks bruised, at the very least, and its attractiveness waning. A slower China means less demand for commodities and other imports, and it might result in less geopolitically-driven Chinese investment and influence in places like Africa. It also means a China with reduced sway as an economic partner in the rich world. Some US officials see the economic slowdown as aiding their efforts to convince sometimes skeptical European and other allies to move away from China. There is no shortage of evidence to support that view.
Antoine Bondaz, a research fellow at the Foundation for Strategic Research, a leading French think tank, said the consequence of a structural slowdown in China is that European companies are choosing to pull out or place new bets on India or Southeast Asia.
“Europe is moving away from China,” Bondaz said.
Germany’s efforts to diversify its economic relationships away from China as part of a new strategy are also being helped by the slowdown.
“The Chinese economy is not growing at rates at which it used to grow,” the new German ambassador to Washington, Andreas Michaelis, told a Center for Strategic and International Studies think tank event on Monday last week. Chinese markets “are not as promising as they used to be.”
Italy, meanwhile, sees an opportunity. A new foreign policy initiative, due to be unveiled next month, aims to extend Italy’s partnerships in Africa and play a bigger role in the energy flows from the continent to Europe, dubbed the “Mattei Plan” after Enrico Mattei, founder of Italian energy company Eni SpA. China’s slowdown — along with a Russia distracted by its war in Ukraine — can only benefit Italy, people familiar with the thinking in Rome said.
Italy recently passed a law allowing the government to exercise special “golden share” powers to block technology transfers abroad in strategic sectors including artificial intelligence, semiconductors and energy — all widely seen as a way to limit transfers to China. The government must also decide by the end of the year whether to renew its involvement in the Belt and Road Initiative that was once the backbone of Xi’s efforts to deepen economic ties across the world. A slowing China weakens the case for Rome doing so. There are those in Europe that caution the strategic balance could quickly flip if China finds its economic feet again more quickly than currently envisaged.
Then there is the wild card: the potential for Donald Trump to return to the US presidency if he wins next year’s election. Europe still sees China in a more mercantilist way than the US, meaning there is always a gap in their policy approaches.
“In Europe, Germany will never approve the scale of what the US wants. If Germany is going to remain an export nation, it can’t really change its relationship with China,” said Jim O’Neill, a former Goldman Sachs economist and UK Conservative government minister who coined the BRIC acronym two decades ago.
In the UK, where officials have been treading a line between treating Beijing as an economic partner and a national security risk, China’s slowdown is being greeted largely as welcome news that would help in the battle against the highest and stickiest inflation in the G7, a person familiar with the UK government thinking said.
In July, the IMF revised down its global inflation forecast by 0.2 percentage points “largely on account of subdued inflation in China.”
In Tokyo, officials are focused on the potential fallout for Japan and are closely watching how China’s leadership manages problems such as an aging population, which they have struggled with for decades. For policymakers and their advisers in Washington and other capitals, it all adds up to a big question about what comes next: Will China’s economic wobbles lead to a more belligerent or a more accommodative China?
Some worry that a wounded China could drive its communist leadership to blame outside forces and rivals like the US for its economic woes, and make increasing tensions more likely. Biden’s national security adviser Jake Sullivan last month sought to head off any efforts by China to blame US policies for its slowdown, arguing that the US was not “seeking to slow down China’s economy or weaken China’s economic growth.”
Sullivan and a long list of Biden officials have stressed the need for ongoing dialogue between the two economic heavyweights and that they are not seeking to decouple from China.
Harris, who used to work alongside Sullivan in the White House and helped draft a speech laying out a new vision for US economic policy he delivered in April, is among those who worry China’s faltering could cause leaders in Beijing to act more rashly.
“A stagnant Chinese economy could well push Beijing toward more geopolitical volatility,” Harris said.
The more benign view is that the slowdown would be a blow to China’s push to sell its economic model as an alternative to those promoted by Western democracies. Or that it would cause China’s leaders to focus on domestic concerns and become less assertive on the global stage.
“You could see it leading to a kind of a de-escalation of competition between the United States and China, particularly with respect to the rest of the world,” the Asia Society’s Cutler said.
On either side of that debate, those in the halls of power agree that even if a China growing more slowly would momentarily ease competition, Beijing would remain a formidable competitor in the global economy for many years to come.
“In key areas, Beijing remains powerful and ambitious: Its defense spending and military might continue to increase, its diplomacy is global, and it is party to economic arrangements that the United States is not,” Fontaine of the Center for a New American Security said. “Reports of its geopolitical demise are utterly premature.”
With assistance from Erica Yokoyama, Michelle Jamrisko, Toru Fujioka, Jenny Leonard, Peter Martin and James Mayger.
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