China’s Looming Decline

China’s meteoric economic rise appears over. Systematic deficiencies like chronic overinvestment, massive debt loads, and a shrinking workforce have put enormous stresses on China’s finances. But these systematic trends have been exacerbated, perhaps irreversibly, by China’s disastrous pandemic response, where rolling lockdowns are a permanent way of life. So far, the CCP’s containment measures have resulted in plummeting industrial output, surging unemployment, capital flight, and a sinking currency. Already, large multinational companies like Apple are shifting supply chains to Southeast Asia and other regions perceived as more stable while expatriates are abandoning the country, and newly minted college graduates flee in droves. Indeed, China’s brain drain has begun.

BY THE INTERNATIONAL CHRONICLES

What if the new era of great-power competition was over before it had even begun? Many of today’s fears about a multigeneration conflict with Beijing rest on linear extrapolations of yesteryear’s data, harkening back to a time when China appeared on track to supplant the United States as the world’s largest economy. Yet more and more signs point to a China that is fully unprepared for the competition with the United States it once sought.

China’s economy, long in decline, is now in freefall—thanks to Chinese leader Xi Jinping’s mismanagement.

Case in point: there are strong indications that China has entered a prolonged era of slow growth. China’s gigantic services sector just contracted at the second sharpest pace on record as Covid lockdowns hit businesses hard.

The Caixin purchasing managers’ index, a closely-watched indicator for assessing the state of the economy, plummeted to 36.2 in April from 42 in March, according to a survey released by IHS Markit on Thursday. A reading below 50 indicates contraction, while anything above that gauge shows expansion. The services sector accounts for more than half of the nation’s GDP and over 40% of its employment. And with survey data showing China’s manufacturing sector also shrinking last month, the world’s second biggest economy went backwards in April.
While conditions might improve as Covid infections rates ease and officials try to limit the damage to the economy, large parts of Beijing have just been placed under tighter restrictions and some economists are now forecasting that Chinese GDP will decline in the second quarter.
The nation’s capital has effectively shut down its largest district, Chaoyang, suspending transportation within it and encouraging 3.5 million residents to work from home as part of its latest effort to curb Covid-19 cases, local authorities announced Wednesday.
The nearly 6-point decline in services activity in April was second only to the collapse in February 2020, when China’s economy came to a near standstill as it battled to contain the initial coronavirus outbreak that started from Wuhan. In that month, the Caixin services PMI dived to 26.5 from 51.8 in January.

Near-empty Nanjing Road pedestrian street is seen during the May Day holiday on May 1, 2022 in Shanghai, China.

Near-empty Nanjing Road pedestrian street is seen during the May Day holiday on May 1, 2022 in Shanghai, China.
Businesses in the world’s second largest economy were already grappling with rising energy and raw material costs, when Covid lockdowns hamstrung their operations further. It has also become harder for firms to pass the higher prices to consumers, because of the impact Covid restrictions have having on customer demand. That has translated to even lower employment.
“Some companies, affected by the drop in orders, laid off workers to lower costs,” said Wang Zhe, senior economist for Caixin Insight Group. The measure for employment in the services sector has been under 50 for four consecutive months, the survey showed. The data came just hours after China reported a steep drop in tourist spending for the Labor Day national holiday.
Tourist spending was only 64.7 billion yuan ($9.8 billion) over the five-day holiday, down 43% from the same period last year, according to a statement by the Ministry of Culture and Tourism late Wednesday. People made 160 million domestic tourist trips during the holiday, down 30% from a year earlier. The data again highlights how China’s zero-Covid policy has taken a heavy toll on its economy.
“Recent mobility trends suggest that China’s growth momentum deteriorated significantly in April,” analysts from Fitch Ratings wrote on Tuesday. They expect GDP to contract in the second quarter, before output recovers in the second half. Nomura analysts also warned last month of a rising risk of “recession” in the second quarter, as lockdowns, a shrinking property sector, and slowing exports hit the economy hard.
As the highly transmissible Omicron variant spreads quickly in China, the country is battling its worst outbreak in more than two years. So far, at least 27 Chinese cities are under full or partial lockdown, which could be impacting up to 185 million residents across the country, according to CNN’s latest calculation.
That includes Shanghai — the nation’s leading financial center and a major manufacturing and shipping hub. The city has been under a lockdown since March 28. Although authorities started to lift some restrictions last month, more than 8 million residents are still banned from leaving their residential compounds.
The Chinese government still adheres to its stringent zero-Covid policy more than two years after the initial outbreak — at a time when the rest of the world is learning to live with Covid. The policy involves mandatory mass testing and strict lockdowns to contain the spread of the virus. But economic costs are rising.
Many economists have downgraded their China GDP growth targets for this year, citing risks from the zero-Covid policy. Last month, the International Monetary Fund lowered its China growth forecast to 4.4%, well below the government’s official target of about 5.5%.
In recent days, Chinese leaders have repeatedly tried to reassure the public about fixing the economy. President Xi Jinping last week called for an infrastructure spending spree to promote growth. And the Communist Party’s Politburo on Friday promised “specific measures” to support the internet economy.
More surprising is that Xi, in an attempt to stabilize China’s finances, has largely abandoned his ambitious plans to overhaul China’s growth model, choosing instead to double down on the very economic policies that got China into today’s economic bind in the first place. 

Put differently, Xi blinked.

Xi’s reversal speaks volumes. It suggests he lacks confidence in his own plan to transform China’s unsustainable economic model into one that can deliver on the Chinese Communist Party’s (CCP) promise of “high quality” growth. More important is that China’s fizzling economic miracle may soon undercut the CCP’s ability to wage a sustained struggle for geostrategic dominance.

Xi is often said to have tapped into Chinese resentment over its colonial-era humiliations to kick-start its modern-day competition with the United States. But the decision to jettison China’s policy of hiding its capabilities and biding its time began much earlier. Indeed, for decades before Xi’s ascent into power, CCP elites made clear this dictum would be discarded as soon as the international balance of power shifted in China’s favor. When Washington looked to be terminally weakened by the 2008 financial crisis, Chinese officials made their move, betting that overseas investments and economic coercion were the keys to outcompeting the West. They were mostly right.

China’s economic clout, beyond any other consideration, still serves as the foundation for the country’s vast influence. The gravitational pull of China’s market, along with Beijing’s ability to influence economic conditions and shape political perceptions in other countries, enabled China to bind itself to the world. The fruits of China’s economic expansion also underwrote its power projection, covering the costs of the Belt and Road Initiative, military modernization, and expanding multilateral commitments. China’s GDP growth paid domestic dividends for the CCP too, empowering a model of state capitalism that broke down the barriers between the private sector and government institutions to mobilize the former in service of the latter.

Nevertheless, China’s meteoric rise, fueled by annual GDP growth above 6 percent, appears over. Yes, China’s economy has been cooling for years, plagued by systematic deficiencies like chronic overinvestment, massive debt loads, and a shrinking workforce, which has put enormous stresses on China’s finances. But these systematic trends have been exacerbated, perhaps irreversibly, by China’s disastrous pandemic response, where rolling lockdowns are a permanent way of life. So far, the CCP’s containment measures have resulted in plummeting industrial output, surging unemployment, capital flight, and a sinking currency.

Efforts to stabilize the Chinese economy will be further strained by a deteriorating external environment, with the World Bank warning of 1970s-style stagflation and reduced global demand for Chinese exports—until now, the engine of China’s growth. The economy remains severely dependent on vast supplies of imported fuel, grain, and other commodities whose prices have massively surged. Western technology transfer restrictions are also taking their toll. Another challenge is growing frustration in China’s largest markets—the United States and the European Union—over Xi’s support for Russia’s invasion of Ukraine. Already, large multinational companies like Apple are shifting supply chains to Southeast Asia and other regions perceived as more stable while expatriates are abandoning the country and newly minted college graduates flee in droves. Indeed, China’s brain drain has begun.