How Xi Jinping’s Policies Could Lead China to Economic Implosion

How Xi Jinping’s Policies Could Lead China to Economic Implosion

At the most basic economic level, China needs the United States—a fact that Xi clearly either hasn’t yet realized or refuses to admit.


Chinese president Xi Jinping, speaking to the Chinese Communist Party’s (CCP) 19th Congress in October 2017, announced: “It is time for us to take center stage in the world.” Yet a funny thing happened on the way to China’s coronation as a superpower: the very policies Xi implemented to transform his country into a global juggernaut are precisely what is gradually driving China toward an economic implosion.

For certain, Xi had help. The coronavirus pandemic and subsequent lockdown slowed domestic growth in China, much like it did for the rest of the world. And China is still the top trading partner for more than 120 countries—so it may seem premature to predict China’s economic decline. But the signs are there.


The Signs

First, China’s Belt and Road Initiative (BRI)—a trillion-dollar infrastructure push that was supposed to cement China’s role throughout the Global South—has unleashed a flood of unbridled corruption, pointless airports, failing dams, deep debt dependency, and widespread backlash. Instead of building loyalty to Beijing among leaders around the world, Chinese corruption has led opposition candidates to rise to power in unexpected places like Malaysia, Sri Lanka, and Indonesia—all while riding a wave of anti-Chinese sentiment. China is now far less popular around the world than it used to be.

Second, Xi has implemented a series of “national security” laws that make investment and business operations in China increasingly difficult. For example, Chinese “anti-espionage” laws make it illegal for international companies to collect even basic information about China or Chinese citizens. As a practical matter, this criminalizes basic corporate due diligence and know-your-customer safeguards—protocols whereby multinational companies look into their counterparties for risks of corruption, sanctions evasion, or human rights abuses. American laws, like the Foreign Corrupt Practices Act and the Uyghur Forced Labor Prevention Act, mandate that companies conduct robust due diligence and that such information is directly shared with corporate leadership. Firms that learn about the use of bribes or modern slavery would need to either violate Chinese law, by reporting the information to their leadership, or violate American law by not engaging in customary due diligence. U.S. counterintelligence officials have issued fresh warnings to American businesses about the risks these laws pose to basic operations and safety for companies and executives operating in China.

Additionally, a recent spate of raids on Western companies and detentions of senior employees demonstrate that Beijing intends to act aggressively against legitimate businesses engaged in standard due diligence in the country—actions that are likely to have major chilling effects on multinational corporations in China. The incompatibility between Chinese laws and global business practices will be even more stark when the European Union passes the much-anticipated Corporate Sustainability Due Diligence Directive, which requires multinationals to conduct comprehensive human rights, environmental, and labor rights due diligence throughout their value chains—a huge percentage of which currently pass through China. As time goes on, these jurisdictional conflicts will increasingly make it impossible for Western companies to operate or invest in China or to route their supply chains through China.

Beijing’s statute claiming the right to examine information and data collected by any Chinese business anywhere in the world is equally damaging. This law applies not only to state-owned entities but every mom-and-pop business operated by Chinese citizens in every single country —in effect turning the entire 10+ million Chinese population living abroad into a massive spying operation. The result of this law will make multinational companies and governments less likely to engage Chinese businesses outside of China, given that such businesses are legally required to pass all information from the transaction directly on to the Chinese Communist Party.

Third, taking for granted China’s role as the world’s largest exporter, Xi has disregarded the opinions of leaders in the countries that buy most of China’s goods. On human rights, on dismantling of Hong Kong’s democracy, on the Russian war, on fentanyl production, and on countless other topics, Western governments have pushed Beijing to rein in its controversial practices—overtures that China has roundly rejected as attempts at interference in its domestic affairs. This attitude ignores that these same countries are China’s main customers—and it is never a good idea to ignore your customers.

Now, new and proposed laws in the United States and Europe are forcing companies to disengage from countries, like China, that continue to brazenly employ forced labor. Furthermore, an increasingly confrontational Beijing has led many Western companies and governments to actively decouple from China or pursue a “China Plus One” strategy by keeping some operations in China while creating supply chain redundancies in alternative locations. China’s economy is still export-dependent, with more than 20 percent of its GDP coming from exports and 40 percent of those being sent to North America and Europe. Ironically, the pandemic has increased dependency on exports to offset slowing domestic growth, putting a damper on the CCP’s objective of transitioning to a consumption-based economy.

Given its substantial domestic economic headwinds and its collapsing real estate market, exporting the economy out of trouble is often a central element of Beijing’s economic recovery plans. But its political intransigence now threatens those exports and, in turn, large portions of its economy. 180 million Chinese workers are employed in jobs that depend upon exports and trade—more than the entire U.S. workforce. This becomes doubly risky for China as it seeks to pivot further away from low-cost manufacturing to producing more high-tech goods and components that are primarily aimed at high-income countries’ markets. Piled on top of that, the Biden administration’s highly anticipated Outbound Investment Executive Order will likely further limit China’s access to critical technology that Beijing will require for this transition.

Possible Paths

At the most basic economic level, China needs the United States—a fact that Xi clearly either hasn’t yet realized or refuses to admit. As a weakening export-driven economy, amid a bursting real estate bubble, with an aging population, the accelerating movement of Western companies and critical supply chains out of China is going to hit a tipping point where China loses economic power slowly and then all at once. This, combined with the Global South starting to push back on the BRI and Chinese meddling in the domestic politics of dependent nations will narrow the potential options left for China to take its time on “center stage.”

With the status quo of the last thirty years eroding, what pathways does China really have left?

Path 1: Appeasement

Given Xi’s policies to date, his temperament, and the domestic popularity of antagonizing the West, this path is almost certainly not on the table for the Chinese Communist Party. And yet, the best and easiest way for China to truly claim its place in the world as a superpower is to play nice with others. If Beijing were to reverse course on its national security laws; engage constructively and meaningfully on Uyghur rights, Taiwan, and Hong Kong; take steps to rein in corruption, money laundering, fentanyl production, and intellectual property theft; and reduce its surveillance state and pro-authoritarian support of global dictators and strongmen, then there is no doubt that the United States and Europe would readily and happily welcome China back into the economic fold. This path is the only way to truly salvage the Chinese economic miracle. China can claim this is all Western-values-based bullying, but the fact of the matter is that we are their customer and we are well within our rights to refuse to buy goods from countries that engage in slavery and actively seek to disrupt the global order.

Path 2: Division

Xi’s preferred path is to divide and conquer Western democracies—fundamentally driving a wedge between the interests of the United States and Europe in hopes of exploiting each. French president Emanuel Macron’s recent statements that France and Europe should take a path of “strategic autonomy” between China and the United States has bolstered Chinese hopes that a fractious and divided Europe can be easily driven apart from a partisan and divided America. And there is truth to the fact that democracies are loud and raucous in internal dissent and international disagreement—particularly in hyper-partisan times.

And yet, Xi’s miscalculation is to underestimate the motivations of a multinational private sector that shares a single, overarching, and unifying goal: to manage risk. While Western politicians banter about divergent approaches to a bellicose China, it is cautious and calculating boards of directors that increasingly are recognizing the costs of doing business in or with China. And while American laws undoubtedly contribute to the compliance-driven decisions of the modern company, it is the imminent EU Corporate Sustainability Due Diligence Directive that will force private companies to seek alternatives to a regime that fails to embrace responsible corporate governance. Once that happens, China will be unable to attract higher levels of Western investment and economic engagement, irrespective of the number of statements by presidents and prime ministers to the contrary.

Path 3: Resistance