THIS DECEMBER marks the fortieth anniversary of the Communist Party’s historic Third Plenum of the 11th Central Committee—considered the beginning of China’s so-called “reform era.” Reform, as everyone knows, has propelled China to phenomenal heights.

Yet the country has reached its high point. China’s political leadership, led by the willful Xi Jinping, is now repudiating the very reformist policies that accounted for the country’s astonishing rise.

And as China approaches the landmark anniversary, many Chinese are swiftly moving from supreme self-confidence to deep anxiety. Xi may remain sure of the regressive and assertive course he has set, but if so, he is alone.

Not long ago, the Chinese people had every reason to be hopeful. China, most believed, would regain its position atop the international system. Many talked of this era as “The Chinese Century,” and China’s dominance was considered “inevitable,” “inexorable” and “indisputable.”
Xi’s signature motto, “the Chinese Dream” of “the great rejuvenation of the Chinese nation,” was repeated incessantly in official circles, and in Beijing there was only one possible future for the country. In the words of the official Xinhua News Agency last October, “China is set to regain its might and re-ascend to the top of the world.” Hubris was everywhere. As Arthur Waldron of the University of Pennsylvania told me in March, referring to Chinese leaders, “They actually believe they are the strongest country in the history of the world.”

China has always been big, but it has at times, due to miserable governance, been weak. Four decades ago at the Party’s historic Third Plenum, Deng Xiaoping overpowered Maoist stalwarts and won adoption of his plan of gaige kaifang, or “reform and opening up.” That approach unleashed the entrepreneurship, energy and enthusiasm that more than a generation of Maoism had not been able to eliminate. Deng then had to periodically overcome resistance in the Party to economic liberalization, but China’s course was set after his 1992 “Southern Tour”—a trip through Shanghai and cities in Guangdong province and a sign economic reformers had finally won out.

Deng’s immediate successor, Jiang Zemin, was also in the mold of a reformer. Zhu Rongji, Jiang’s hard-nosed premier, forced the breakup of state-owned enterprises and negotiated China’s entry into global commerce with the December 2001 accession to the World Trade Organization. Jiang and Zhu also ensured that China’s new financial markets developed and flourished.
Hu Jintao, Jiang’s successor, presided over a decade of economic growth but little structural change. His rule, beginning in 2002, is now correctly considered a time of missed opportunity. Observers thought Hu’s weak political position hampered reform efforts because, among other reasons, he was not able to overcome the determined opposition of interests that had been able to enrich and entrench themselves in the early years of the reform period.

Optimists rejoiced, therefore, that the Communist Party’s next general secretary, Xi Jinping, promised to be a far stronger leader. The general narrative was that the new supremo would be able to implement change, and many observers declared the Third Plenum of the 18th Central Committee of November 2013 to be another seminal event. At its conclusion, the Party announced structural reforms and, in attention-grabbing language, declared that henceforth the market would play a “decisive role” in the allocation of resources. “Decisive,” according to an official source after the Plenum, meant “other forces can influence and guide resource allocation, but the decider is no other than the market.”

Forget the market. The decider in the era of Xi Jinping has proven to be Xi himself. “The culprit is massive state intervention,” wrote Scott Kennedy of the Washington, D.C.-based Center for Strategic and International Studies last year. Throughout Xi’s tenure, the state has, as is so often said, “advanced” and the market “retreated.” Xi, believing in the primacy of the Party and the power of the state, has forced China back to something Mao would be familiar with.

Xi, for instance, has been busy recombining already large state enterprises back into dominant market players and, in a few cases, formal state monopolies. He has increased state subsidies to favored participants and has tightened already strict capital controls, often enforcing unannounced rules.

Xi has also placed a new emphasis on industrial policy. Most notorious among these is his Made in China 2025 initiative, announced in 2015. CM2025, as it is known in China, aims to make the country nearly self-sufficient in, with the addition of 5G wireless communications, eleven crucial industries, including, aircraft, robotics, electric vehicles, information technology, medical products and semiconductors.

At the same time, Xi has been closing off China’s markets to foreign companies with discriminatory law enforcement actions, state media-promoted boycotts and legislation, like the Cybersecurity Law and National Security Law, designed in part to prejudice non-domestic competitors. Beijing has been blatantly disregarding its obligations under its trade agreements and has continued to take, by theft and by rule, hundreds of billions of dollars of foreign intellectual property each year.

Moreover, Xi dramatically increased state control over the equity markets. In the summer of 2015, controlling shareholders were prohibited from unloading shares, “malicious” sellers were investigated, state institutions and others were required to buy stock and banks were forced to rollover stock loans. These measures have since been relaxed, but there is still more state influence now than when Xi took over in 2012.

Finally, Xi is pushing the partial nationalization of the tech sector by encouraging state enterprises to take stakes in startups. Moreover, he has been inserting Communist Party cells into both private businesses and foreign-owned operations. In China, this era is called “the second period of socialist transformation.”

State-directed economic models like Xi’s can mobilize resources and produce growth in the short term—Stalin and Mao produced superior results after first taking power and Kim Il-sung did so after the Korean War—but no such model has been able to sustain growth. Unfortunately for Xi, he came to power when China’s economic cycle was close to its apparent end. According to the official National Bureau of Statistics, China’s last year-on-year contraction in gross domestic product occurred in 1976, the year Mao died. And economic analysts see only trouble ahead for the country, starting with its unprecedented accumulation of indebtedness. Hu Jintao and his premier, Wen Jiabao, overstimulated the economy through lending to avoid the effects of the 2008 global downturn, and now under Xi the Chinese economy is hooked, unable to grow without large doses of it.

Today, the country is accumulating indebtedness faster than it is growing, “eating itself alive” as Anne Stevenson-Yang of Beijing-based J Capital Research characterized it in comments to me. When the so-called “hidden debt” is taken into account, the country is now incurring maybe one-and-a-half times as much debt as it is producing nominal gross domestic product if the official gdp figures are accurate.

They’re not. Beijing reported 6.8 percent growth for the first half of this year and claimed growth for twelve straight calendar quarters remained in the 6.7–6.9 percent range. Growth, in reality, has been far lower. The country’s figures are not consistent with underlying indicators. For example, Beijing claimed 6.7 percent growth for 2016. The World Bank, however, released a bar chart in the middle of last year showing that in 2016 China’s gross domestic product grew 1.1 percent. The 1.1 percent figure, shocking to many, is close to the single best overall indicator of Chinese economic activity: total primary energy consumption. In 2016, total primary energy consumption, according to official sources, was up, but only by 1.4 percent. In 2017, the economy picked up—energy consumption increased 2.9 percent that year—but gross domestic product could not have increased by the claimed 6.9 percent.

The evident stagnation explains apparent unease in Beijing as officials realize they cannot, unlike earlier periods, outgrow their difficulties. In a startling moment last October, Zhou Xiaochuan, then the head of the country’s central bank, publicly warned about rising debt accumulation when he said the country was approaching its “Minsky Moment”—the point where asset values collapse. He appears to be right. Beijing’s half-hearted attempts at “deleveraging” produced a recent wave of bond and other defaults this year, and Chinese officials, to keep up growth, have now abandoned that effort.

The country’s leaders have some ability to postpone debt crises. Beijing tightly controls borrowers, lenders, markets, courts and just about everything. Yet, despite the central leadership’s firm grip, Xi cannot decree outcomes forever. He can only postpone what economists euphemistically call an “adjustment,” but by delaying it he is only making the inevitable crisis larger. And when the crisis eventually comes, it will overwhelm China. As the widely followed Michael Pettis of Peking University pointed out last December at the Fortune Global Forum in Guangzhou, the difference between China’s situation today and debt crises in other countries is that in those prior crises the imbalances were not as large and debts were not at such high levels. As time progresses, therefore, debts are further outpacing resources and underlying dislocations are becoming larger. Recessions, which the Communist Party does its best to avoid because it is politically insecure, are essential, allowing adjustments to be made while they are still relatively minor.

There is a growing awareness that China’s next downturn will be severe. Chinese leaders, it has become evident, will prevent adjustments until they no longer have the ability to do so. And, when that fateful time comes, their system will undoubtedly go into free fall.

Xi has been avoiding crisis by increasing state control over the economy, but he has, despite a half decade, not been able to fashion a solution to the underlying problem of a slowing economy. The only long-term solution would be to reverse the trend toward state dominance; in other words, allow, as Deng did at the 1978 Third Plenum, market forces to allocate resources.

SO WHY doesn’t China’s leader do what worked four decades ago and what virtually everyone knows is the only way out now? More state control fits in with Xi’s view that China must have a strong ruler, and he has spent his tenure atop China cementing the Communist Party’s control over the country and consolidating his control over the Party. Many have likened Xi to Mao, the first ruler of the People’s Republic of China, but he is also compared—more appropriately—to Qin Shi Huang, considered the first emperor of a unified China.

Xi, by adopting in his pronouncements the language and imagery of Chinese emperors, has invited such comparisons. It is no accident that the leader of a Chinese state sliding from authoritarianism to totalitarianism—Xi is known as the “Chairman of Everything, Everywhere, and Everyone”—would seek to emulate emperors. “As long as the Chinese authoritarian political system remains unchanged, for its political security and survival,” Fei-Ling Wang of the Georgia Institute of Technology told me, “China’s ruling group is bound to behave like a typical Chinese imperial regime of the past: to centrally control as much as possible of everything at home.”

Central control is the basis of China’s imperial concept of tianxia, or “all under heaven.” Chinese emperors maintained they were the world’s only legitimate rulers, and to enforce that system they closed off the Chinese portion of their realm from what they considered their other domains. Wang notes in The China Order: Centralia, World Empire, and the Nature of Chinese Power that this was not a formula for success, writing that the tianxia system

has a record of suboptimal performance that features despotic governance, long stagnation of economy, suffocation of science and technology, retardation of spiritual pursuits, irrational allocation of resources, great depreciation of human dignity and life, low and declining living standards for the masses, and mass death and destruction periodically and frequently.

Wang also points out that there were, interspersed during millennia of horrible governance, three golden periods: the centuries immediately before the rule of Qin Shi Huang; the Song era, from the tenth to thirteenth centuries; and the period beginning in the late nineteenth century. All three times were marked by China’s relative openness and repudiation of tianxia.

Xi Jinping, for more than a decade, has been repudiating openness and speaking as if he were an emperor, often invoking tianxia themes. In the last several years, Xi’s imperial-inspired language has become increasingly explicit. As he declared in his 2017 New Year’s Message, “The Chinese have always held that the world is united and all under heaven are one family.”

The vision of unity is cherished by strongmen, especially those promoting utopian ideologies in polities that are in fact divided. Communist China these days is by no means united.

DISCONTENT IS widespread, and economic decline is one of the motors of unrest. In August, for instance, protestors traveled to far-flung locations to gather at the offices of defaulting companies, like conglomerate HNA Group in Hainan, or to the center of Chinese power. In the capital, hundreds of police had to “lock down” the city’s financial district in the face of demonstrations against failed peer-to-peer (P2P) lending platforms. Hundreds of thousands of investors across the country have lost money in these “P2P” vehicles, and they are, with some justification, blaming the state for losses. They therefore converged on the offices of the China Banking and Insurance Regulatory Commission and a critical Communist Party body: the Central Commission for Discipline Inspection, the anti-corruption watchdog.

The “financial refugees,” as they call themselves, unnerved Chinese leaders. These types of protests are of special concern because the 1989 demonstrations in Beijing and 370 other cities were originally fueled by mismanagement of growth, specifically inflation. This time, discontent is more of a concern to the regime because two generations knowing nothing but increasing standards of living are facing the prospect of a severe downturn.

These demonstrations are occurring at about the same time as other elements in society are taking to the streets over economic issues. In May and June, thousands of People’s Liberation Army veterans converged in various cities around the country—and especially in Zhenjiang in the coastal Jiangsu province—to protest the beating of a fellow veteran. But the outpouring was fueled, like veteran demonstrations were in 2016, by poor job prospects, inadequate benefits and broken government promises.

Authorities were able to defuse each of these sets of protests—and others over essentially non-economic issues like adulterated vaccines for children—but the bad news for Xi Jinping is that demonstrations are now coming in waves, showing fundamental unhappiness in Chinese society.

There is unhappiness in part because the regime’s elite has kept too many resources for itself. For one thing, the amount of corruption has been almost beyond belief. “The Chinese economy is coming off a decade of financial elites feasting off trillions in debt,” Stevenson-Yang points out. “The amount of skimming is absolutely staggering.”

Also staggering are Xi’s commitments, like those contemplated by his “project of the century,” the “21st Century Maritime Silk Road” and the “Silk Road Economic Belt”—the two components of his much-talked about “One Belt, One Road.”  The Belt and Road Initiative, as it is also called, is a trillion-dollar commitment to infrastructure that advances Xi’s geopolitical goals to route global trade through China but which the private sector had continually shunned as uneconomic.

Moreover, Xi has other grand ambitions requiring large commitments of cash. There are, for instance, hundreds of billions of dollars for modernization of the armed forces and tens of billions in foreign aid and loans that will never be paid back. Many worry about China’s “debt-trap diplomacy” ensnaring nations that cannot repay and therefore falling into China’s orbit. But the consequence of that is China carrying doubtful loans on its books, like some $23 billion still owed by Venezuela.

Some of these projects may pay dividends in the future, but Beijing will bear carrying costs in the meantime. Xi, in short, has overextended China, which now faces economic demands, both internal and external, that the country cannot possibly meet.

AT A time when Xi has pursued a closed economic model that has failed China so many times in the past, he must deal with three factors that will inhibit growth in the future. First, there is extreme environmental degradation. Decades of pursuing growth, especially during the 1950s and the four decades of the reform era, have left the country with poisonous air, black water and toxic soil. Water has become scarce, even where it was once plentiful. China can continue to destroy its environment to permit factories to churn out products, but people are demanding cleaner surroundings. As they do so, planned facilities are often delayed, sometimes reduced in scale or on occasion dropped altogether.

Second, demography will inhibit China’s growth. China’s economy grew fast in the reform era in large part because of the “demographic dividend”—an extraordinary bulge in the workforce caused by Mao Zedong’s push to out-procreate the rest of the world. Now, however, the country’s population is approaching rapid decline due to Deng’s One-Child Policy. The workforce is already shrinking, first peaking in 2011 according to official statistics. Beijing now maintains the population as a whole will hit the high point “around 2030.” In reality, the peak will probably occur well before then, perhaps as soon as 2020 as one senior official publicly said a few years ago. In any event, China’s population is on course to drop by more than 400 million this century, mirroring the frightening fertility declines occurring in, among other East Asian jurisdictions, Japan, Taiwan and Singapore.

Beijing’s move to a two-child policy, effective the beginning of 2016, has not arrested alarming demographic trends. China’s birth rate has continued to fall with 17.23 million births last year, down from 17.86 million in 2016.

None of this says that Chinese technocrats cannot grow their economy in the future. But it does say they will have to manage in spite of declining birth rates, not be propelled by them. The Communist Party has shown it can reduce births—officials proudly claimed the coercive One-Child Policy prevented 400 million of them—but it has so far failed to increase fertility, its latest effort.

Third, China no longer enjoys the support of the United States or even the European Union. Decades of Beijing’s predatory trade practices have changed minds in foreign capitals as have Xi’s overtly aggressive and belligerent geopolitical moves. Until recently, China had progressed fast in large part because successive American administrations wanted it to succeed. Now, the United States has become either hostile or indifferent. As a result of American policies that either are intended to undermine China or do not take into account Beijing’s interests, the increasingly rigid Chinese economy and financial system are being stressed. Other countries and blocs, especially the European Union, are following suit in challenging Beijing.

President Donald Trump’s “trade war”—the imposition of tariffs—has the potential for shaking the export-dependent Chinese economy. The problem for Beijing is that it has become deeply reliant on the American market. Last year, China’s merchandise trade surplus from exports to the United States constituted a stunning 88.9 percent of its overall merchandise surplus. Add to that China’s merchandise surplus with the United States in 2017, which amounted to $375.6 billion, and it’s clear Trump holds the high cards.

So far, the American president, unlike his predecessors during the last forty years, has shown a willingness to use American power to undermine China. Chinese analysts are starting to understand that their country, for many reasons, cannot sustain a long-term struggle with its most important customer. Not surprisingly, China’s equity markets and currency all fell precipitously this year as the “trade war” started.

XI HAS lost support abroad, and at home he is simply out of step with society. Perhaps the most important consequences of forty years of Chinese economic reform is modernity.

Xi can get his way because he commands the power of the enriched state and Party and has at his disposal what is surely the most sophisticated set of social controls in history. But he has trouble compelling compliance except when resorting to the crudest forms of coercion. Due to modernization, he does not have the power to persuade. Take what are called Xi’s Cultural Revolution-style campaigns, such as his effort this summer to promote “the spirit of patriotic struggle” among intellectuals. Many ridicule him, but the overriding reality is that China’s intellectuals—and the Chinese people—are just not paying attention.

“The Cultural Revolution analogy really doesn’t capture what is happening here now,” Sam Crane, a political science professor at Williams College, told The National Interest toward the end of a stint in Beijing on the campus of Renmin University of China. In his words,

After a month on the Renda campus I can say I have seen no sign of the Xi Jinping personality cult. Indeed, throughout Beijing Peppa Pig has been more prominent than Supreme Leader Xi. Moreover, throughout the city signs of American soft power influence—in consumer preferences, in the lines outside the U.S. embassy, in the personal messages on tee-shirts, in the youth culture in bars and clubs—is still quite strong. Perhaps Xi and other conservative Party stalwarts are pushing the patriotic campaign against intellectuals precisely because they know they are losing the larger culture war.

The censors working for China’s ambitious leader this spring banned Peppa Pig, but that did not do much good. They only heightened the adorable cartoon character’s popularity in society, even creating sympathy for the slackers who made the animal their symbol.

China’s strength—and the regime’s ultimate weakness—is that the Chinese people are often defiant, mostly irrepressible and always noisy. They have the temerity to protest and, in any event, almost always find a way to express how they feel, whether Xi likes it or not. Xi can create a surveillance state with a projected 626 million cameras in place by 2020, but he does not need a single one of them to see where society is going.

Many Chinese see Xi’s moves to be “the comprehensive resuscitation of totalitarian politics,” as Tsinghua University law professor Xu Zhangrun stated in a widely circulated essay. “After forty years of reform,” he wrote, “overnight we’re back to the ancien régime.”

In many ways Xu is correct, but this time there is a new hint of popular discontent, even inside the Party itself. “I recall a topic hotly debated online by young internet users: Who is really China’s enemy? Is it America? Japan? Russia?” wrote Luo Jianbo, chief of the China Foreign Policy Center of the Central Party School, last September. “If we think about things coolly, perhaps none of them are. China’s enemy is itself.”

Gordon G. Chang is the author of The Coming Collapse of China.