Analysis | China’s rulers reckon with troubling ‘headwinds’

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Six years ago, Chinese President Xi Jinping made his last trip to Davos, Switzerland, to attend the annual conclave of global elites up in the mountains. The speech he delivered then to the gathered dignitaries and jet-setters at the World Economic Forum was striking for two reasons.

First, in its substance: Xi styled China under his watch as a custodian of the international order, a paragon of globalization and free-trading liberalism and an opponent of self-defeating, nationalist protectionism. And second, in its subtext: Donald Trump’s inauguration was just days away, and Xi could play the adult in the room as the Davos set braced for “America First” disruption to grip global politics.

This week offers a reminder of what has and has not changed. Trump’s emphatic victory in the Iowa caucuses underscored how large his shadow will loom over the United States and the world in the months to come. In Davos, a major delegation from China unnerved U.S. counterparts. Chinese Premier Li Qiang used his Tuesday plenary address to preach Beijing’s commitments to international comity and prosperity, stressing the need to keep global supply chains “stable and smooth.”

But now China’s position on the world stage is markedly different. Xi’s ruthless quashing of Hong Kong’s political freedoms focused attention on the intensifying authoritarian character of his regime. Thanks in part to Trump, it’s also become more commonplace for politicians in the West to sour on the entire project of globalization and specifically lament the ways in which Beijing manipulated the rules of the road to its advantage.

After attempts to meddle in Taiwan’s elections fail, China takes stock

And China itself is weaker than it seemed in 2017. In his New Year’s address, Xi acknowledged the “headwinds” facing the Chinese economy, which is in the midst of a structural slowdown shaped by sluggish exports, weakening demand, rising unemployment and jittery investor confidence that never recovered in the wake of the pandemic.

“Some enterprises had a tough time. Some people had difficulty finding jobs and meeting basic needs,” Xi said, promising to “consolidate and strengthen the momentum” of China’s economic revitalization.

That’s easier said than done. Li told the audience in Davos that China’s GDP grew some 5.2 percent, matching a 5 percent target Beijing set the previous year — though far slower than the country’s pre-pandemic pace of growth. China is expected to set a similar target for the coming year.

“While robust compared with developed economies, last year’s target was China’s lowest in decades,” the Financial Times explained. “After harsh lockdowns battered the economy in 2022, it should have been easy to achieve, analysts said, but the government was forced to step up fiscal support after growth wavered in the middle of the year.”

A dramatic outflow of foreign investment represents a startling shift in China’s image. “Chinese firms are investing more abroad than foreign firms are investing in China, and foreign firms now seem unwilling to invest in China at all,” Chatham House’s David Lubin noted. “In the three months to September, foreign firms withdrew $12 billion of capital from the country, the first time that’s happened in a generation.”

Li used his opportunity in Davos to make the pitch for foreign business, avoiding more potentially divisive rhetoric and posturing over wars in Ukraine and the Middle East. But he’s fighting an uphill battle, with Xi’s heavy-handed statism and crackdowns on private enterprise spooking foreign capital and even domestic investors, while Chinese consumers tighten their purse strings and Chinese youth face record unemployment.

China is grappling with a set of interlocking challenges: “A drawn-out property slump that is hurting consumer confidence and investment, heightened scrutiny of foreign companies’ activities in China, and regulatory crackdowns on successful private-sector industries such as tech and education,” Jason Douglas of the Wall Street Journal outlined. “The specter of deflation, as well as rising interest rates in the U.S., have also played a role in sucking money out of China.”

In Davos — where China’s rise has so often been the toast of the town, celebrated by admiring politicians and financiers — Beijing seemed almost the sick man of the global economy. Kristalina Georgieva, head of the International Monetary Fund, called on China to implement significant reforms in an interview with reporters there.

“Ultimately, what China needs are structural reforms to continue to open up the economy, to balance the growth model more towards domestic consumption, meaning create more confidence in people, so [they] don’t save, they spend more,” Georgieva said.

Taiwan elects Lai Ching-te as president. China calls it a dangerous choice.

Analysts are watching for what measures Xi will deploy to shake up fiscal and monetary policy. “I think it’s a critical year for the Chinese economy in the sense that deflation could be entering a vicious cycle,” Robin Xing, chief China economist at Morgan Stanley, told the FT.

Meanwhile, Xi has to lick his wounds on other fronts. That includes the aftermath of the presidential election in Taiwan, which saw the victory of China’s least-desired candidate — and a third-consecutive term in power for the Democratic Progressive Party, which is more openly defiant of Beijing and hostile to Xi’s rhetoric of eventual reunification with the mainland.

Communist Party organs recirculated an old 2022 speech by Xi after Taiwan’s vote, in which China’s president said Beijing needed to do more to “develop and strengthen the patriotic, pro-unification forces in Taiwan.”

That’s typical jargon for winning the hearts and minds of ordinary Taiwanese voters, ideally through the promise of tighter economic ties with China. According to a readout by Bloomberg News, Xi pointed to how a healthy Chinese private sector may warm Taiwan to its cross-strait neighbor. Given China’s travails under Xi, such a vision is as illusory as ever.

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