The Chinese economy is confronting significant hardships, and among the limited options available, there are just two roads to recovery. The first would be a full reintegration into the global system. The second would be a short-term real estate sector boost to prevent an immediate collapse while exploring alternative solutions. Regrettably, both options have either been rejected by China’s leader Xi Jinping or pose substantial challenges.
Integration into the global system has been a key driver of China’s remarkable economic growth over the past four decades. China’s economic foundation rests on three pillars: investment, consumption, and exports. Yet the first two pillars, investment and consumption, have proven problematic. The Chinese economy has heavily relied on real estate and government infrastructure projects, but the real estate market is a fragile bubble unequal to the role of underwriting a robust economy, despite generating temporary growth. Infrastructure investments aimed at boosting GDP face similar issues, making investment, too, an unreliable foundation.
The second pillar, consumption, has its own issues. China’s consumer base remains weak due to significant wealth inequality; a small group of wealthy individuals coexists with a majority of much poorer citizens, and their spending alone can’t support the entire economy.
The true powerhouse of China’s economy is manufacturing exports. China’s “world factory” status is where it earns real profit, and these exports serve as the bedrock of China’s economic foundation. China’s collaboration with the developed West has driven significant progress in science, technology, and business operations.
If China can rebuild this pillar, there is potential for economic recovery.
And yet, the path to reintegration seems to be narrowing, if not closed altogether. There are rising labor costs and geopolitical factors, and Xi Jinping’s attitude indicates that he is increasingly giving up on integration as a goal. Xi’s absence from the recent G20 summit in India spoke volumes about his reluctance to engage with the leaders of the world’s wealthiest and most influential countries.
In fact, as of now, Xi has only made three foreign trips, all to countries friendly to Beijing. This is a significant departure from his pre-COVID practice of at least 10 trips per year.
This reluctance likely stems from domestic political pressures, China’s economic challenges, and strained relations with India. Yet whatever the reason, this is not an effective approach if China wishes to rejoin the international system.
The outcome of the U.S. Commerce Secretary Gina Raimondo‘s recent China visit remains uncertain. Though Raimondo brought up the interdependence between the U.S. and Chinese economies, unwavering restrictions on high-end chip exports to China due to national security concerns signal ongoing tensions. Beijing realizes that the U.S.-China relations are unlikely return to their previous state, when the U.S. provided market access, funding, technology, and management training, all essential to China’s current economy.
China’s most persuasive argument to the West right now is now that China’s economic problems will hurt the global economy, including the U.S. and the West, if they aren’t ameliorated.
And China is right: It is in the best interest of the West to help China avoid a collapse. The Western world has a vested interest in ensuring the stability of the Chinese economy. As Raimondo put it in a News Hour interview, “We do about $700 billion of trade with China every year, which underpins hundreds of thousands of jobs in America. So anything that we can do in trade with China that creates jobs in America or helps U.S. businesses to grow and innovate is a good thing.”
Despite this profound interdependence and China’s urgent need for western support, Xi Jinping seems to favor coercion rather than engaging in diplomatic efforts to achieve his objectives. China opposes “guardrails” on its U.S. relationship, refuses regular military communication, and makes it difficult for western diplomats to reach Chinese officials. This is a dysfunctional approach that is pushing the door to reconnect with the West shut.
As China’s hopes for reintegration dim, intensive real estate stimulus policies have emerged. These policies include reduced down payments for mortgages and significantly lower interest rates, along with the removal of purchase restrictions in many cities. These measures have temporarily bolstered the real estate sector, preventing an economic collapse and buying time to explore alternatives. Stocks of Chinese real estate companies have surged in response.
But this is a short-term solution at best. According to the Chinese media, there are enough houses in China to accommodate 3 billion people—yet the population is declining. Finding a replacement for real estate and exports amid Western technological sanctions poses a formidable challenge for China’s future.
Ms. Gao is a journalist and host of Zooming In with Simone Gao.
The views expressed in this article are the writer’s own.