If Beijing’s maritime ambitions were not enough, Xi has also turned west with OBOR. The grandiose hope is to link Asia with Europe, a plan so ambitious it leaves Xi enough room for variegated assessments of success or failure. If OBOR is mostly a way to rid China of excess capacity and purchase more influence in neighboring countries, it may well “succeed.” But if the strategy is meant to reshuffle Eurasian geopolitics by creating a “New Silk Road” linking East and West, with China at the heart, it will almost surely fail.

The biggest stumbling block is the long-term ability to fund such an endeavor, let alone protect it. For now, Chinese overseas direct investment to wealthy locales, such as the US and Australia, isincreasing faster than investment to high-risk OBOR nations in continental Asia. OBOR funding must compete for state resources with PLA modernization, internal security budgets, a rising pension burden, and environmental remediation projects that are unprecedented in size and duration.

The risks of Xi’s foreign policy approach are twofold. First, as Xi acquires a base in an unstable region, devotes more resources to Central Asia, and pushes contested maritime claims, the chances of a foreign policy failure have grown. China has little experience managing a high-stakes competition with a set of capable rivals such as the US and Japan, or countries willing to stand up to it under certain conditions such as Vietnam. Eventually, one of its rivals may push back hard (e.g., demonstrating that the militarized new “islands” are indefensible or placing US and allied exercises closer and closer to its shores), leaving Beijing with few palatable options. This scenario could be highly embarrassing to Xi who has cultivated a strong-man image. Part of the party’s claim to the mandate of heaven is that it is reversing centuries of foreign humiliation. No CCP leader can be seen creating new humiliations.

Second, his ambitions may be unaffordable under conditions of economic stagnation. Xi himself hinted at these realities this spring, “In the face of mounting pressure resulting from the economic downturn, with a slowdown in budgetary income and growing expenditure, it is not easy to secure a normal rise in the military budget anymore.” A PLA with budget increasing at “only” 5 percent a year will still be a formidable fighting force in East Asia, but overseas basing, far seas missions, and infrastructure protection on the Asian continent are expensive endeavors. And 5 percent increases will become an increasing strain on China’s economy.

A stagnating China’s best analogue is not the stagnant Japan of the past two decades. Because of Beijing’s geopolitical ambitions, the better comparison is to Putin’s Russia, albeit with a much larger economy and thus more durable power. Despite already poor demographic conditions and a shrinking economy, Putin continues to exert Russian power abroad. He remains a popular leader and therefore can sustain these ambitions for a strategically relevant period of time. Similar to Russia, China is discontent with an American-dominated geopolitical order and has a strong sense that it should be the leading power in its region. Political power will likely remain centralized, and opposition will be put down ruthlessly. Xi will walk a tightrope on foreign policy adventurism. Right now his activities in the South China Sea serve both strategic goals and his nationalist domestic policy goals. The risk of this approach has been, and will remain, low as long as the US continues its tepid response. Going forward, he will calibrate assertiveness based on how much he needs to fuel nationalism and how great the strategic payoff China receives, measured against the risk of a real or perceived failure (e.g., the US effectively stops China from creating new manmade islands).

US Policy Implications:

China’s stagnation has two broad implications for US strategy. First, Washington has more strategic leverage in the bilateral relationship than it imagines. Since the 2008 financial crisis, the central organizing ideas driving Washington’s China policy are that the US is in relative decline and that economic “interdependence” limits more assertive US options to challenge China’s aggression. Both of these ideas are inaccurate.

While the US has serious long-term fiscal problems, it is far more powerful and wealthy than China. According to net private wealth statistics and other data relevant to national economic capabilities, the economic gap between the US and China is vast and may continue to grow. The US can choose to put itself on a better fiscal course and translate more of its wealth into geopolitical and military power in ways that China would be hard pressed to challenge.

And “interdependence” does not quite describe the bilateral relationship. China depends on the US for secure sea lines of communication needed to import commodities, for contributions to its food supply ranging from soybeans to pork, and as a safe repository for its finances—for example the US has become China’s preferred choice for discretionary overseas investment. Most important, the US continues to provide stewardship over the international economic system, and its willingness to run by far the world’s largest trade deficit drives global growth in a way China never has.

In contrast, although the US has benefited from Chinese investment and the import of low-cost consumer goods assembled in China, these goods are already starting to be sourced from other locales, and falling Chinese reserves have already started to limit investment potential. If relations deteriorated, the US can inflict far more economic harm on China than the reverse. This is not interdependence.

Strategic Leverage:

In short, the US will retain the clear upper hand in a relationship that is growing more competitive. Washington should reorient its strategy based on its strategic leverage. The huge gap between the two country’s private sectors and deterioration in the economic position of the Chinese state leave the US a budget deal and entitlement reform plan away from translating economic advantage into even greater strategic advantage.

Another key source of American leverage is CCP insecurity. Xi needs to inspire nationalism and demonstrate that he is leading the process of national rejuvenation, but he cannot risk a foreign policy failure that would make him look weak at home. That means he will press on contentious issues until it becomes too risky to continue. For example, his South China Sea aggression has worked. He has paid no real cost and can credibly claim to his people that he is retaking lost territory and gaining control over China’s historic seas. But if the US took action to stop China from dredging new “islands” in such places as the Scarborough Shoal, Xi would not have many responses. If the US began to convoy fishermen to waters they can legally fish, Xi would be left with a host of bad options. If the US began an active diplomatic initiative with maritime claimants in Southeast Asia to resolve conflicting issues of maritime rights and territories without China, Beijing would be isolated. These strategic initiatives should be accompanied by a renewed US informational campaign emphasizing how Xi is isolating China when there are many other options to integrate the country with the international community.

The US should make it clear that it is not seeking confrontation with China. Indeed, Washington has done much to welcome China as a great power. Rather, US strategy should be aimed at demonstrating that a policy of aggression and assertion will not end well for Xi and the CCP and that there are better options. Indeed, exercising strategic leverage could enforce a second American goal: China’s return to Deng-like reforms. China’s troubles are not cause for unbridled celebration. Yes, they provide the US with the opportunity to push back against China’s aggression. But in the longer term, a stagnating China constitutes a far more unpredictable geopolitical rival. The brief history of the PRC offers examples of foreign policy adventures used to sway the people to support grand, transformational political initiatives. Domestic radicalization has caused problems for the US in particular (e.g., the Great Leap Forward and the Taiwan Strait crisis).

On the other hand, relations with China improved substantially when Deng Xiaoping started economic reform. Bilateral ties were also more stable during Jiang’s and Zhu’s reforms of the mid- and late-1990s as Beijing developed much more interest in a stable international financial system. Admittedly, China was less capable of pushing its security interests at that time. American strategic objectives should be to deter highly aggressive moves by Xi to clearly show that the US will take advantage of the risks he has taken, while using high-level diplomacy and economic carrots to further market-based cooperation.

Conclusion:

China appears to be headed toward a period of sustained economic stagnation. For now Xi has demurred from returning to the market reform of Deng and Jiang. His country faces crippling debt levels, in excess of $25 trillion and climbing, the main cause of slowing growth as increasing amounts of capital are devoted to debt service. Adding to this is an aging population, whose pensions are grossly underfunded, and the long-term misuse of natural resources.