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The West might be hoping domestic economic strains facing China will curb its appetite for global competition, even foreshadowing a retreat. But the opposite seems much more likely: an intensification of Beijing’s geopolitical assertiveness, worsening relations with the U.S. and its allies, possibly to a dangerous degree.
The Chinese economy is expected to slow significantly over the next two years, as it faces a series of domestic challenges, including a prolonged downturn in the real estate sector as well as its demographic decline. You would think, then, that in the near-term, at least, Beijing might be more focused on its economy than consolidating its global posture. Yet, Chinese government actions of late, coupled with the leadership’s mindset, suggest otherwise.
Investors and economists appear to have little confidence in Beijing’s recent measures to deal with economic headwinds. Critically, Beijing seems reluctant to put in place a substantial stimulus package to boost domestic consumption, akin to the spending it delivered to tackle economic downturns in 2015 and the global financial crisis. The likely reason for the Chinese leadership’s reluctance is that it would face strong internal political challenge, as significant institutional and economic changes would be required.
In order to generate sufficient stimulus funds, Beijing would need to amortize large amounts of non-performing investments, such as property and infrastructure projects that do not seem to be generating enough returns — overcapacity a key reason. The only other option would be to implement reforms that switch China’s growth model from one led by investment in infrastructure and property to one driven by consumption or other, more productive, sectors, such as hi-tech.
But there are problems with this. While China has been trying to reorientate its economy towards innovation, there’s insufficient capacity in this sector to absorb the capital required for such a shift. For this reason, China would instead need to boost domestic consumption, likely problematic for the Chinese leadership.That’s because it would have to transfer funds from the government and state-backed sector to households to raise their incomes. This would necessarily mean devolving power and control to ordinary Chinese citizens; something Beijing has been desperate to avoid doing over the past decade.
Given its aversion to restoring the economy in this way, Beijing will sooner or later realize (if it has not already) that its ability to project power globally will become progressively limited. In recent years, China has invested heavily in its capacity to exert geopolitical and geoeconomic influence, by both strengthening economic ties with other countries and building its own military capacity.
In response, the U.S. has been bolstering its military alliances, particularly in the Indo-Pacific: increasing military deployment in South Korea and signing a new agreement with the Philippines giving the U.S. access to more military bases there. And, at the same time, Western countries are trying to contain Beijing on various other fronts, such as by tightening legislation and screening around Chinese investments.
With funding for its military likely to start diminishing, Beijing’s window of opportunity to act decisively overseas, not least over Taiwan, is beginning to close. And there are two reasons why it feels it has to act while it still can.
Firstly, Chinese President Xi Jinping’s reluctance to roll back on his ambition for China to become a truly global super power rivaling the U.S.; and secondly, the need for Xi to demonstrate to his people, increasingly dispirited by the economic slump, that the country remains a force on the world stage, able to project power and thus protect Chinese interests. China’s ambition to “reunify” Taiwan lies at the heart of Xi’s narrative of “national rejuvenation,” underlining why Beijing would contemplate, sooner rather than later, resolving the island’s future — once and for all.
Given its declining economic strength and related concerns over losing global influence, Beijing may suspect the West of trying to take advantage of China, possibly prompting it to pre-empt any real or imagined attempt to do so. For this reason, the risk of a major crisis involving China and the U.S. will only increase further in the coming few years, not diminish.
What we might see is China becoming much more assertive. This could take the form of bigger military exercises around already-established flash points, such as the South China Sea and Taiwan, as well as other antagonistic actions. We are already beginning to witness this. In 2023, China announced a three-day, no-fly zone in airspace northeast of Taiwan, subsequently limiting it to just 27 minutes. That raised international concern about possible wider disruption to commercial aviation in the area. Other combative posturing could involve Beijing providing more military and economic support to autocratic friends, such as North Korea, Iran and Russia, in defiance of the West.
China may also choose to use economic levers to up the ante with the West. For instance, it might ban export of critical minerals — such as cobalt, lithium and magnesium — to Western nations, including the U.S. These are critical for innovation and development in the high-tech, renewable energy and defense industries. Such a ban would likely result in global shortages, undermining the economies of countries unable — or who struggle — to find new sources in other parts of the world. And despite recent skepticism around China’s economic prospects, the country remains a major market for many multinational firms, whose activities China could threaten to limit or obstruct to gain leverage over its geopolitical adversaries.
That said, should China aim to intensify its rivalry with the West, it will likely err on the side of caution and not deliberately seek direct confrontation, initially at least. This could change if its economic power continues to wane, and its ability to compete dissipates. Then, there is a real risk of Beijing throwing off its restraint, particularly if Donald Trump is elected president in the U.S. He may seek to robustly challenge China over Taiwan, Chinese trading practices or relations with U.S. enemies. That might trigger a hostile act, which, if mishandled by a Trump administration, could lead to a dangerous, possibly catastrophic escalation.
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The post Why China’s economic woes should raise concern for the West appeared first on Energy News Beat.
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