China continues to navigate the murky waters of potential recession and political unrest. In just the past week, the country has seen an increase in COVID-19 cases, decreased reserve requirements to boost the flagging economy and – most notably – widespread protests against the country’s zero-COVID policy. This unrest is little more than a month removed from the beginning of President Xi Jinping’s third term ruling the country, which was accompanied by a significant reorganization of leadership within the Chinese Communist Party.
To discuss these issues, we turn again to Christian Lundblad, Senior Associate Dean for Faculty and Research and Richard “Dick” Levin Distinguished Professor of Finance at UNC Kenan-Flagler Business School. In a follow-up to his previous analysis of the country’s economic prospects, Professor Lundblad responds to questions on Xi’s reappointment and China’s standing in a deglobalized world.
What does Xi’s reappointment mean for China, both internally and externally? What do you think his top priorities will be moving forward?
President Xi appears to possess an ideological orientation not observed among the Chinese leadership since Mao.[1] Mao’s very consequential successor, the market-oriented reformer Deng Xiaoping, and the various party leaders who followed were largely focused on economic development; by contrast, Xi has reinserted the Chinese Communist Party throughout the Chinese system. In particular, the CCP again plays a central role in the allocation of economic resources. On the heels of Xi’s apparent lifetime appointment, I envision an even greater role for the state in economic decision-making. The post-Mao idea that China should focus on low-profile economic growth at all costs is gone (Deng famously said “hide your strength, bide your time”). Instead, Xi appears to be driven by a 21st-century Marxism that may prioritize (1) a nominally more inclusive form of growth designed to promote “common prosperity” and (2) an economic independence that demands a far larger role on the global stage.
On the first point, for reasons I enumerate in an earlier Kenan Institute commentary, China’s massive and growing economic headwinds will imperil its ability to create broad-based economic prosperity. The very fact that the state possesses an outsized role in economic activity is already a central impediment to China’s realizing its potential. Further consolidation of decision-making power will only exacerbate the misallocation of critical resources. On the second point, any notion of “low profile” concerning China has been relegated to the dustbin of history. Rather than hiding, China under Xi is more visible and consequential than it has been for a couple of centuries. This newfound confidence is creating friction along many fronts both near and far. Given the mirror-image reactions from other countries to this reemergence – including from the U.S. under both Presidents Donald Trump and Joe Biden – one possible casualty is globalization as we knew it.
One modest bright spot worth noting: Xi has, for the first time since the outset of the pandemic, reappeared on the global stage, in person, with various global leaders (including Biden). Do not underestimate the importance of these engagements for facilitating dialogue and promoting understanding. However, this well-received foreign-facing development stands in sharp relief against a growing disaffection inside China regarding the hopelessness of a misguided, never-ending zero-COVID policy. As a very real reflection of the immense costs of the zero-COVID policy, the current demonstrations in China are simply stunning. I haven’t any idea as to how this will play out, but stay tuned.
How will China – the world’s largest exporter – be affected by the trend toward deglobalization? Is it possible for them to adjust their economy smoothly, given that they’ve been so export-oriented?
I will raise two points about deglobalization – one focused on the implications for China’s maturation and another that reflects the very unsettling direction in which much of the world may be moving.
First, China, unlike the Soviet Union in an earlier time, is deeply rooted in global economic activity, and any shift toward economic fragmentation will be disruptive and costly (to the China skeptics, be careful what you wish for). China is a massive exporter, and few supply chains fail to touch Chinese firms. Hence, a limited role for Sino-U.S. or Sino-EU trade would require a massive adjustment for Chinese-exporting firms. A forced move toward a more domestic economic orientation would only add to the economic headwinds China is facing.
None of this is to say that China doesn’t have massive institutional work to do. As mentioned, a central impediment to the realization of China’s potential is the distortionary effects of an outsized (and growing) role for the party. A critical component of any serious institutional reform necessarily involves a fairer state of play for cross-border trade and investment (with a diminished role for the party). However, it should also be noted that despite these lingering unfair practices, China is already a massive importer of global goods and services. Any economic fragmentation will then strain the global businesses (and their employees) already actively selling to China. Finally, before turning to broader deglobalizing trends, it is worth mentioning that any fragmentation that cuts out Chinese exporters necessarily impacts their many customers worldwide. This includes average Americans and Europeans who purchase Chinese goods at a significant cost advantage. Households would face elevated prices at precisely the time when inflationary pressures already pervade the globe.
Second, I wish to make a final warning about a troubling misunderstanding regarding deglobalization as a solution to our many ills. While income inequality has risen in the U.S. and parts of our society have unambiguously struggled over recent decades with the dislocations associated with the rise of China, no nation has benefited more than the U.S. from the postwar institutional order that it helped to build. Further, the peaceful nature of the latter part of the 20th and the outset of the 21st centuries stands in sharp contrast to the bloodiness of the first half of the 20th. This is not by accident.
Globalization is associated with broad-based global poverty reduction never witnessed in the history of our species. Economic fragmentation risks all this very real, human progress. While there may indeed be legitimate national security arguments for greater supply chain resilience or investment in domestic capacity, do understand that any significant reshoring of economic activity is costly. Even if justified, insurance is never free. At a minimum, we risk a much more expensive world. More frightening is the risk that healthy economic competition is replaced by something far more dangerous.
[1] Rudd, K. (2022, November 10). The World According to Xi Jinping: What China’s Ideologue in Chief Really Believes. Foreign Affairs. https://www.foreignaffairs.com/china/world-according-xi-jinping-china-ideologue-kevin-rudd
Can China Navigate Internal Unrest – And A Deglobalized World?