Take a good look, China’s master plan for economic dominance is faltering

Xi Biden - Kevin Lamarque/Reuters

Xi Biden – Kevin Lamarque/Reuters

As the UK and the US, each embroiled in the perverse consequences of democracy, struggle to thwart Putin’s wild ambitions in Ukraine, their respective China strategies face a vigorous challenge from Beijing. Xi Jinping pushes the tightrope to the extreme in the Taiwan Strait and redoubles, as in Honduras, his global efforts to isolate Taiwan.

Meanwhile, major Western tech companies, alarmed by geopolitical uncertainty and facing hostile data “legislation,” are leaving China in droves. Microsoft has already retired LinkedIn and is moving a team of AI experts to Canada to avoid local pressure on them.

The below-average performance of the best-known Chinese stocks is forcing some seasoned Western asset managers to reduce their exposure. Where is this debacle leading and where could it end?

Risk has been defined as exposure to hostile intent and capability. This saying omits an essential question: whether the party at risk is aware of what is happening. Arguably, much of the “free” world ignores or denies Xi Jinping’s political drivers, intentions and capabilities.

This in itself is extremely risky. A Tipping Point in China The risk is fast approaching, and with it an opportunity to turn this to the advantage of the West.

Xi Jinping is pushing ahead with plans for a new revisionist era in which China becomes the sole superpower in an authoritarian, post-democratic world order. Its immediate tactics include opportune alliances with other enemies of the West to defeat sanctions and other preventive countermeasures without military conflict.

It seeks to exploit political and economic division and disarray in the West, including through its tacit support for Putin’s illegal invasion of Ukraine. His deceptively neutral peace initiative in Ukraine lacks substance – indeed, it may be deliberate – but it symbolizes his ultimate yearning for global authority.

However, Xi is still far from achieving this. Although propaganda trumpeted China’s triumph over the Covid virus and prospects for renewed growth, part of Xi’s aggressive haste stems from the realization that the Chinese Communist Party state remains riddled with vulnerabilities.

China rapidly globalized its economic influence by exploiting the West’s illusion that once admitted to the World Trade Organization (WTO), it would engage in trade under WTO rules and standards. . But from the outset, it denied foreign companies free and fair access to its home market and used massive state subsidies to seize market dominance for its own products and systems around the world.

From 2018, the United States waged a de facto trade war against this, while remaining uncomfortably tied to the Chinese economy by enduring debt and supply chain dependencies.

The ensuing geopolitical and economic tensions have steadily escalated due to China’s human rights abuses, political interference, cyber espionage and intellectual property theft, mistrust and disruptions of the supply caused by the pandemic, alignment with Russia and threats against Taiwan.

This has led to an accelerated exodus of major Western companies from China to more reliable regional bases in Southeast Asia, India and Bangladesh. The low cost of factory labor in China, once a major draw for FDI, no longer applies. Factory wages in southern China are now about three times higher than in equivalent South Asian industries.

The Chinese economy has long struggled under the Marxist ideological grip of Xi Jinping. The Covid lockdown at the start of the pandemic was an instinctive response by the CCP’s crisis management to potential social disruption. Imposed with a disastrous delay, it slowed transmission but failed to boost immunity.

“Zero Covid” proved powerless against the omicron variant, but was only abandoned when the national export-driven economy was badly damaged by unnecessarily prolonged coercive lockdowns.

Unsurprisingly, the promised recovery did not materialize. Exports are depressed and the real estate market is in disarray, with more and more major players being delisted from the Shanghai stock exchange. The tech sector remains traumatized by Xi’s politically motivated crackdown in 2021, which cut many jobs for young, educated workers at a time of severe youth unemployment.

Debt remains toxic, demographics intractable (despite a huge increase in mortality among underimmunized older people soon after the abrupt relaxation of Zero Covid rules). Environmental constraints, especially water security, are getting worse.

Seemingly ignoring these headwinds, Xi Jinping’s model of economic resurgence is a distinctly ideological formula called a dual-cycle economy. The idea is to boost domestic technical innovation and production, leveraging this to give China a head start in global advanced technology markets, while reducing reliance on technical cooperation with the West.

This construction is tied to existing anti-market nationalist measures and a protectionist and sanctions-proof subtext, going badly with claims that China is now open to the world for “business as usual”. The recent use of arbitrary data protection legislation to seize records, detain personnel and freeze important ESG and other compliance work carried out by foreign consultants in Shanghai and elsewhere also undermines this claim.

Xi is hoarding gold, securing energy supplies and bolstering China’s military capabilities, especially those used to threaten Taiwan. To say that he will not invade Taiwan, for a while at least, for fear of economic consequences misses the point.

Xi would prefer to annex Taiwan without a fight, but he must be able to deploy enough military force to undermine American support to the point that the Taiwanese lose faith in him and accept the inevitable. But it won’t be profitable and scaring off IDEs won’t fill any coffers.

Xi shows little ability to tackle the fundamental unsustainability of the Chinese economy. Failure to do so could sweep away his dreams of a new revisionist era. Much has been said lately about China’s “risk reduction”. It is a two-way process; this should lead to renewed and concerted economic pressure, including heightened sanctions, against a regime that already poses far more of a global threat than Russia.

As one Indian commentator has observed, the imperative is to build national power and work in step with China’s only global “balancer”, the United States. The “Atlantic Declaration” is welcome; now he needs to grow some teeth.

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