Is the prediction of China’s global dominance fading?

How the paths of geopolitical fortune can change. It was only a few short years ago that some commentators and politicians took the view that the United States was in decline, and it was only a matter of time before China took over as the world’s leading economic power. The current view coming out of Washington and other capitals of the G7 is that they are gaining the upper hand against a weakening China, mostly due to deep-seated economic and structural problems. Experts suggest that flows of economic capital around the world that have been guided by economic narrative for the last twenty years or so are quickly being turned on their head.

Experts are suggesting that the combined wisdom of the G7 see both opportunity and risk as China’s economy begins to slow down and that concern over China’s inevitable rise to power as “The Political and Economic Powerhouse” of the 21st Century has now turned to concern over a declining China economy and population. Indeed, President Biden at a political rally in Utah earlier this summer, referred to China as a “ticking time bomb in many cases”, because of weak growth and the many different economic challenges it is facing. 

Furthermore, on Tuesday 29th August whilst travelling on board a high-speed train from Beijing to Shanghai, Gina Raimondo, the Secretary of Commerce for the United States of America, articulated that a number of US companies had advised her that due to increasing risk, China had become increasingly uninvestable. Global investors have been turned off by unpredictable crackdowns in sectors such as education and e-commerce. As a result, a record outflow of foreign net selling of USD 11.4 Billion (Renminbi 82.9 Billion) in Chinese stocks was recorded for the month of August with FDI (Foreign Direct Investment), at its lowest level since 1998, when records first began.

Secretary Raimondo went on to say that China’s policies are giving American firms a different set of challenges as they have charged exorbitant fines without any explanation, sending shockwaves through the American community by revising counterespionage laws and conducting raids on businesses. Furthermore, in May of this year, Chinese authorities in this case their Cybersecurity Administration, barred operators of key and influential domestic infrastructure from purchasing products from Micron, America’s biggest chip maker, citing without any detail that they are a national security risk. This was a strange policy as for China’s chip making industry to be effective and competitive, they need to import tools from the US, Japan and the Netherlands, and there are no credible alternatives in China.

In June of this year Janet Yellen, the United States Treasury Secretary said China is facing a challenge in terms of investment and growth due to their declining population. Secretary Yellen also alluded to soaring youth unemployment and the currently collapsing real estate sector which originally made up about 25% of aggregate demand. Many officials in the United States suggest that China has made a grave error and should have opened their economy more, instead they ignored decades of advice, and they now predict a brake on growth in the coming years. Even Secretary Yellen’s No2 Deputy Secretary Adeyemo recently said, “the Chinese are creating a less favourable environment for FDI and foreign companies. 

China is considered to be the world’s foremost growth driver, and administrators and officials within the G7, are already wondering how their own markets will fare, as the USD18 Trillion market begins to slide south. In fact, recent data released showed that China fell into deflation in July, with factory gate prices seeing an extended decline. Experts suggest that China is entering a period of declining economic growth with wages and consumer prices stagnating. The main gauge of inflation, the CPI (Consumer Price Index), fell by 0.3% in July as confirmed by the NBS (National Bureau of Statistics China), with analysts predicting a year-on-year decline of 0.4%. They confirmed that the data was a strong signal that the economy was weakening, which is a grave concern for eurozone economies and companies as China is a key trading partner.

The US-China Economic and Security Review Commission is a bipartisan panel which is a platform for warning of the consequences of China’s rise to economic and geopolitical power. The commission was created on 30th October 2000, and was charged with reporting to congress the national security implications of the bilateral trade and economic relationship between the United States and China. On the 21st of August Congress held a review into the commission’s findings on China’s current economy and implications for investors and supply chains. 

Among the speakers was Logan Wright, Director of China Markets Research at the Rhodium Group, who informed the hearing that China’s economic slowdown is structural in nature, saying “Beijing is no longer a current pacing threat or likely to overtake the United States in any significant measure of economic power over the next two decades”, citing issues such as China’s property sector and the local government debt crisis. 

Another speaker was Nicholas Borst, Vice President and Director of China Research at Seafarer Capital Partners, who suggested that three policy mistakes could be attributed to China’s current economic slowdown. He cited “a failure to moderate the real estate deleveraging campaign, a crackdown on the private sector that has damaged business confidence, and a failure to adequately prepare for the post-covid era”. Borst suggested that China will, over the next few years, place its focus on their economic domestic challenges. Given China’s need for on-going and increasing foreign investment, this would consequently place US policymakers in strong negotiating positions. Borst went on to say, “China is still one of America’s most important investment and export markets”. He suggested that in order to directly benefit American firms and boost exports, US policymakers should grab the opportunity and seek greater market access and other reforms. 

Just how long the slowdown in China will take is still unclear because as experts and analysts point out, the country has more than enough financial resources to avoid an out and out financial collapse. Even though Beijing, on an almost daily basis, has been making efforts to support the property sector, and despite recently announced plans to support the Renminbi, officials in Beijing have refrained from an all-out stimulus to the economy. As such, more than one in five people are unemployed, with some estimating that the actual jobless figure is much higher that the 21.3% as shown recently by data released from official sources. 

In recent months America’s economy has moved ahead of China’s economy, opening a substantial gap thanks to a stronger US Dollar, with analysts confirming that this trend is likely to continue. However, cautionary notes from European, American and Japanese officials is that there should be no indulging in triumphalism since concerns arise over the impact on their own companies and the global economy as a whole due to weaker demand from China. 

Sentiment is appearing to shift and is impacting on western governments’ policies, as was shown in August by the much-anticipated limits on outward bound investment in China. These limits released by the Biden administration were narrowly focused and fairly weak, but as a White House source said, the limits were deliberately dumbed down due to China’s own economic strains and hostile policies. Indeed, their own government is succeeding in discouraging any American investment much better than any White House restrictions might achieve.

However, certain officials suggest that within many strategic sectors, China remains a formidable challenge, and that challenge will remain in place for many years to come, suggesting that they will beef-up their own industrial policies whilst buttressing any alternative supply chains. One expert on American US trade with China suggested that China will now get old before it gets rich, but of equal importance is the strength and ability of China’s industrial policy that is trained on certain strategic industries, such as the electric car sector. Faced with all the negative economic factors and China’s slowing economy, America should not get overconfident as China still remains a formidable economic rival.

This is exemplified by China’s deepening links to countries in the Middle east and Global South, where an increasing number of countries are showing interest in joining the BRICS* group, further illustrating China’s increasing influence in emerging markets. However, China’s de facto leadership of BRICS is built on its own economic rise and growth, and that particular model is certainly looking somewhat patchy. With China’s economy slowing down there will be less demand for imports such as commodities, which may result in countries such as those found in Africa.

*BRICS – is a grouping of Countries of Brazil, Russia, India, China and South Africa formed in 2010 by the addition of South Africa to the predecessor BRIC. The common goal is to deepen cooperation between member countries, and to stand in contrast to the western sphere of power. The countries that were invited to join BRICS in 2023 are Argentina, Egypt, Ethiopia, Iran, United Arab Emirates and Saudi Arabia. Recent developments hint at a new currency backed by gold. 

This will also impact China’s ability as an economic partner with richer countries such as the G7 who US officials are trying to encourage to reduce economic ties with China. There is plenty of evidence to support the US officials, in fact on 28th August, whilst addressing the Centre for Strategic and International Studies in Washington, the German Ambassador said Chinese markets are not as promising as they once were. He went on to say that the Chinese economy is not growing at rates it previously used to grow, and reports from Germany suggest they are currently making efforts to diversify away its economic relationships with China. However, a number of analysts suggest that they cannot really move away from ties with China especially if they wish to remain an export nation. 

Meanwhile in Italy, due to be unveiled in October a new foreign policy will be directed at increasing energy flows from the continent to Europe, which can only benefit Italy thanks to Russia’s war with Ukraine and China’s economic slowdown. Furthermore, the government recently passed a Golden Share law, allowing the government special powers within the strategic sectors to block transfer of technology abroad, (which is basically seen as to limit transfers to China) in areas such as semiconductors, energy and artificial intelligence. Also, the Prime Minister Giorgia Meloni has indicated to Beijing that she intends to withdraw Italy from the investment pact (which has partially strained relations with America) the Belt and Road Initiative* which was signed in 2019.

*The Belt and Road Initiative – also known within China as the One Belt One Road or OBOR/1BR for short. It represents a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in more than 150 countries and organisations. There are currently 154 member countries ranging from Afghanistan and Algeria, to Bahrain and Barbados, to Saudi Arabia and Singapore, and to Turkey and the United Arab Emirates.

In Great Britain the authorities are somewhat sitting on the fence as they tread the fine line of treating Beijing as a national security risk and an important economic partner. The slowdown in China’s economy is welcomed not for any geopolitical reasons, but for the fact it will help bring down inflation which is currently the highest within the G7 group. 

Finally, in the capitals of the G7 countries it is reported that officials worry whether or not China’s economic travails will lead to them being more accommodating or more belligerent/ combative. There are of course two separate views on which way China may choose to go. One view is that a stagnant or receding economy will push Beijing into more aggressive moves on the geopolitical stage, while others suggest that they will concentrate on domestic matters rather than the global geopolitical stage. One think tank has even suggested a de-escalation on competition between the United States and China particularly in respect to the rest of the world. 

Whatever happens China will still remain a serious global force and competitor within the global economy, and despite problems at home their defence and military expenditure continues to increase. They enjoy global diplomacy on a par with their western counterparts and in some cases stronger relations, and they are according to a number of experts party to economic transactions and arrangements that America is not. So, hawks beware, write China off at your peril. Despite big economic problems at home, they are still a major force in global geopolitics and will be for some time to come.