A construction worker at the site of a new bridge project in Guiyang of Guizhou Province, China.  (Wu Dongjun/Visual China Group via Getty Images)

The hopes that China’s integration into the global market would transform it into a responsible stakeholder have foundered on the reality of China’s increasingly mercantilist economic policies; its aggressive expansion of political power; the resurgent dominance of state-owned enterprises; and an economy driven by debt and real estate. These practices could be leading China down a path to financial catastrophe, Hudson Senior Fellow Thomas Duesterberg argues in a new policy memo. See below for key takeaways and read Duesterberg’s latest op-ed in The Wall Street Journal to learn more about the dangers of China’s trade practices.  

Key Takeaways

From Thomas Duesterberg's policy memo, "The Diminishing Path to Growth: Can Xi Jinping Avoid Crisis during China's Economic Transition?"

1. Xi Jinping's Politically-Driven Economic Model

Xi Jinping’s vision of reinventing and imposing a state-directed, CCP-dominated model [could be observed at] China’s March 2021 Party Congress, where he outlined plans to double per capita income in China by 2035. His overall strategy emphasizes several elements: increasing China’s economic self-sufficiency while making the world more dependent on its economy; enhancing China’s economy and military in ways that exploit the vulnerabilities of other countries; and increasing China’s world leadership in high-technology industries while amassing leverage over global resource flows such as minerals and energy supplies. Domestically the project privileges the requirements of CCP top-down direction as well as bottom-up micromanagement, in part by requiring all state-owned banks and private enterprises to have CCP members on their management committees.

2. The Security Risks of China's Economic Slowdown

Growth has immense political salience in the PRC—it justifies the authoritarian system of governance—and a significant slowdown or recession could lead to political instability. Given Chinese nationalist rhetoric and revanchist ambitions toward Taiwan, political instability could in turn motivate risky military activities that escalate into confrontations with democratic, market-oriented countries. From the perspective of the United States, a slowdown could exacerbate the already serious trade and economic tensions, especially if nationalist forces in China sought to cast the US as the scapegoat for its internal problems.

3. Xi's Crackdown on Business Leaders

China’s elite circles, high-level officials, and business tycoons remain a source of opposition to Xi; the evidence is the number of individuals publicly targeted, disappeared, jailed, or worse. During the Xi tenure some 432 “tigers” or high-level officials or politicians have felt the sting of Xi’s anti-corruption campaigns or purges, as have some 4 million lower-grade cadres. 

[As part of Xi’s new politico-economic program,] authorities have put in place punishing new regulations for—or have banned outright—leading innovative companies Alibaba, Didi, and Tencent and the private tutoring and ridesharing businesses. Hundreds of firms have been fined more than $3 billion, apps have been purged, and a “regulatory onslaught” has been unleashed. The result of this effort is reduced innovation and risk-taking along with a climate of fear among some of China’s best-performing digital technology companies.

Quotes may be edited for clarity and length.

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