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The Undoing of China’s Economic Miracle

Perhaps Xi believes that the industries targeted for state support are too important to be left to the unpredictable free market. Perhaps he thinks that a heftier role for the state could help firm his hold over party and government. “He wanted more control, and he thought having a big state sector was an element of achieving that,” Lardy explained.

Xi could also be motivated by fear and distrust. Since the days of Deng, the mantra of Beijing’s top policy makers had been “reform and opening up,” which stressed integration with the global economy. Xi, however, wants to limit that integration, or at least engage with the wider world on different terms. China, of course, will still sell you all kinds of stuff and happily take your money. But Xi wishes to reduce China’s reliance on other countries, especially potential adversaries such as the United States. From Beijing’s perspective, the Trump administration’s restrictions on technology sales to the telecom giant Huawei Technologies and other Chinese outfits exposed the dangers of counting on untrustworthy foreigners, and Xi intends to ensure that China’s advance can’t be upset by politicians in Washington or elsewhere.

Thus Xi’s priorities have turned inward. “He is feeling under siege,” James McGregor, the chairman of the China arm of the consulting firm APCO Worldwide, told me. Chinese officials “are eliminating all vulnerabilities to the outside world, or reducing them as much as they can.”

Read: How Xi Jinping blew it

Xi’s new strategy, something he calls “dual circulation,” splits Beijing’s economic worldview in two—a domestic focus on companies in China making stuff for Chinese consumers, and an international one on the country’s exchange with the outside. How this concept will work in reality is not entirely clear, but it signals a shift in China’s economic relations with the rest of the world. Beijing previously fused domestic reform and globalization into a powerful engine of development. Now it is hinting at intensified stress on strengthening the domestic economy to bolster China against an uncertain and potentially more hostile global environment.

In certain respects, this may not be a bad thing: For years, economists have been barking at Beijing that its economy’s growth would be healthier if it relied more on Chinese consumption than investment or exports. But this change may also mean China will engage in foreign trade and investment in ways that support this agenda. In other words, China will stay open for business—if that business helps protect its own interests.

This dovetails nicely with another of Xi’s goals, self-sufficiency. China, he believes, should produce homemade substitutes to key products now bought from overseas—especially microchips and other critical technologies. To protect national security, China needs “independent, controllable, safe, and reliable” supply chains, Xi said in an April speech, with “at least one alternative source for key products and supply channels, to create a necessary industrial backup system.” Localizing technology has been a long-standing Chinese ambition, but China watchers think Xi has thrown that plan into hyperdrive.

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