When China’s Economy Slumps, so Does Beijing’s Political Power

By Anders Corr
Anders Corr
Anders Corr
Anders Corr has a bachelor's/master's in political science from Yale University (2001) and a doctorate in government from Harvard University (2008). He is a principal at Corr Analytics Inc., publisher of the Journal of Political Risk, and has conducted extensive research in North America, Europe, and Asia. His latest books are “The Concentration of Power: Institutionalization, Hierarchy, and Hegemony” (2021) and “Great Powers, Grand Strategies: the New Game in the South China Sea" (2018).
July 18, 2023Updated: July 19, 2023

Commentary

China’s economy is in desperate straits. So desperate that officials in one county in Guangdong Province offered an illegal bribe to U.S. investors.

Any U.S. corporate “decision maker” who brings investment, according to The Wall Street Journal, would get 10 percent of the deal’s total value. A $100 million investment by a U.S. company, for example, could yield a kickback of $10 million to the company’s CEO. Shareholders would be stuck with the lousy investment while the CEO laughed all the way to the bank and then cried onward to prison.

Meanwhile, the value of investments in China is increasingly hard to estimate as the regime treats normal due diligence activities by U.S. companies as espionage and due diligence firms withdraw or downsize in the communist country.

Profits made in China by foreign firms are now more difficult to repatriate, so they risk having no other option but reinvestment in China.

The Chinese Communist Party (CCP) is targeting the most successful private ventures, including those founded by Chinese nationals, with massive fines, bans, regulations, and detention of business leaders. Any company or leader seen as competition to Xi Jinping and his totalitarian rule is squashed.

The CCP is threatening to detain regular U.S. citizens, too. Last month, the U.S. State Department issued a warning against traveling to China due to the increased risk of wrongful detention.

Epoch Times Photo
The closed office of the Mintz Group is seen in an office building in Beijing on March 24, 2023. – Five Chinese employees at the Beijing office of U.S. due diligence firm Mintz Group have been detained by authorities, the company said on March 24. (Greg Baker/AFP/Getty Images)

Beijing’s threats against Taiwan, decoupling in the form of technology and mineral export controls, tariffs, draconian COVID-19 lockdowns, human rights and international law violations, and blocks on international data flows instituted by China’s regulators, have dealt additional body blows to China’s economy and foreign direct investment (FDI).

FDI into China dropped from $100 billion in the first quarter of 2022 to just $20 billion in the same period of 2023. China’s GDP grew only 3 percent in 2022, one of its worst years in decades. The China share index of MSCI is down 2 percent this year, compared to a 15 percent gain for stocks globally. The yuan is at eight-month lows, which could improve exports, but makes some investors nervous when revenues are in yuan.

China’s financial regulators are trying to reverse the tide by courting the world’s biggest U.S. investors in a symposium this month. In an uncharacteristic fashion, they will ask the investors for feedback and a better understanding of the challenges faced by global investors in China. While China’s regulators promise that the tech crackdown, which started in 2020, is over, its arbitrary nature under the thumb of Mr. Xi makes it hard to trust the regulators’ word.

One of China’s strongest supporters over the last decade has been Germany. Volkswagen and BMW manufacture and sell massive quantities of vehicles in the country. But even Berlin is pulling back from China. On July 13, the German government announced it would reduce dependence on Chinese supply lines in critical sectors, including electric vehicles, medical technology, pharmaceuticals, rare earth elements, and computer chips.

After experiencing Russia’s stoppage of gas supplies to Germany to pressure the European Union not to support Ukraine, Berlin finally realized that dictatorships like China could use trade as a cudgel against it. “In key areas, the [EU] must not become dependent on technologies from [non-EU] countries that do not share our fundamental values,” a government strategy paper stated.

In a potential first, Germany stated that it would issue provisions to limit federal funds for research and development with China “in which knowledge drain is likely.” The United States, Japan, and other EU countries should take note and follow suit.

The CCP’s strategy for its own economic revitalization is multi-fold.

First, revive international trade and investment ties to the West, especially Europe. On July 15, China’s foreign minister, Wang Yi, asked the EU to “clarify” its “strategic partnership” with China, agreed in 2003. The relationship has been under particular stress since 2019, when the EU officially recognized China as an “economic competitor” and “systemic rival,” in particular because of Beijing’s support of Moscow’s belligerence.

Mr. Wang adopted his typically imperious tone, adding that the partnership “should not waver.” The China-EU relationship is unlikely to improve without significantly better human rights and international rule of law in Beijing, which is unlikely given the CCP’s hegemonic ambitions. Its culturally homogenizing impulses—to the point of genocide of Uyghurs, Tibetans, and Falun Gong adherents—don’t help.

Second, Beijing seeks to boost China’s economy by reorienting production to domestic rather than international consumption. This can include elements of greater stimulus spending, including in the sagging property sector. Stimulus, however, is overdone already in China, and the property doldrums of ghost cities are a symptom, not a cause, of a more general economic malaise and diversion of stimulus to inefficient production. Plus, a wealthier populace has traditionally been linked to democratization. That entails significant threats to the CCP as Chinese citizens may want to democratize once their basic needs are met. Mr. Xi instead appears to be focused on export markets, which increases the CCP’s global economic wealth and control.

Third, Beijing seeks to increase its regional economic integration and, through this, its economic influence or even control over its near-abroad in Southeast Asia. However, Beijing has abused its relationships in Southeast Asia for decades, including through military attacks on Vietnamese forces in 1973, 1979, and 1988, and island grabs from the Philippines in 1994 and 2012, for example. Few in Southeast Asia really trust Beijing anymore. While they will trade with China—including allowing Beijing to use their territories for legalized transshipment to places like the United States and European Union—they will not trust the CCP so much as to allow them much more political influence in their countries.

So the CCP has painted itself into a corner economically and politically. This isn’t surprising as communists have never been good at operating in the free market or among free and diverse populations in liberal democracies.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.