Conflict is not for the faint of heart. That applies equally to the United States and China as they now mark the sixth year of conflict, the onset of which I date to August 2017 when then President Donald Trump instructed US Trade Representative, Robert Lighthizer, to investigate China for intellectual property theft and unfair trading practices. With the Chinese economy now on a decidedly slower growth trajectory than it was six years ago, the question arises as to what this weakness portends for the US-China conflict?
I wrote a couple of articles this week that touch on different aspects of this question. In the Financial Times, I stressed that there has been a rush to characterize China’s problems as fitting all too neatly into any one of a number of a stylized boxes—another Japan, a victim of debt-intensive structural imbalances, or the classic result of autocracy’s ultimate impasse. While there is some validity to each of these characterizations, the match with modern China is hardly perfect. I underscored that China is very much a blended system that has oscillated back and forth between the dominant role of rigid state control (Mao Zedong) and a more flexible market-based system (Deng Xiaoping). Under Xi Jinping, there has been reversion to more of a Mao-like system, with the state now accounting for approximately 30% to 40% of the Chinese economy.
Blended systems are not only tough to control, but even harder to troubleshoot and correct when things go wrong. In my latest Project Syndicate piece, I argue that China’s underwhelming stimulus package is an outgrowth of two key flaws in its blended economy: the excesses of debt-intensive growth by State-Owned Enterprises and financial problems of large property developers, initially Evergrande and now Country Garden. If Beijing were to go back to the well for another large debt-financed stimulus, those problems would only go from bad to worse.
The bottom line of a surprisingly muted stimulus for China’s weak blended economy underscores the distinct possibility that underlying economic growth will slow markedly from the 7% average pace that has been evident since the end of the global financial crisis in 2009. And that takes us to the question raised above: What do prospects of a subpar growth trajectory, possibly holding in the 3% to 4% range in the years ahead, portend for the US-China conflict?
The answer boils down to Xi Jinping. As China’s most powerful leader since Mao, Xi has not only shifted the blend of its economy back to state control but he has also instilled a new sense of ideological focus to Party and social control. In doing so, he has framed these moves around the aspirational vision of the Chinese Dream, with a stated goal of China’s rejuvenation as a great power requiring sustained vigorous growth that takes it to the lofty perch of a high-income economy by 2049.
Subpar growth poses a formidable challenge to Xi’s promises of the Chinese Dream. Leaders who can’t deliver on their most important promise basically have two choices—tightening control to squash complaints and dissent or deflecting attention away from problems at home to a foreign threat such as that posed by the United States. As the dominant leader of China’s blended system, I suspect that Xi Jinping will do both.
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