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Peak China

America isn’t the only menace the CCP worries about. In 2021, the party took aim at another lethal enemy of China’s rejuvenation: divorce.

Beijing mandated a thirty-day cooling-off period for married couples seeking a divorce, during which either party could call off the split. Women’s rights advocates warned that the new policy would make it harder for battered wives to leave abusive husbands and pointed out that the measure was part of a larger trend. In 2018, Chinese judges granted divorces in just 38 percent of cases brought before the courts, the lowest percentage on record. During the COVID-19 pandemic, Chinese officials openly hoped that prolonged lockdowns would lead to vigorous patriotic baby-making and proposed special taxes on childless couples. The CCP has even cracked down on vasectomies.

Beijing explains these measures as efforts to promote family values. But what’s really at issue is an acute fear of demographic decline. For decades, China’s birthrate has been far below the level required to maintain current population size. A shrinking, aging population cannot deliver robust economic growth. Without robust economic growth, the Chinese dream is an illusion. Which means that divorces, childless women, and sterilized men are, from the CCP’s perspective, a threat to the country’s geopolitical future.

If American politicians often say that foreign policy begins at home, the CCP is taking that aphorism literally. It is also, characteristically, stifling any suggestion of trouble on the horizon. After the Financial Times reported in April 2021 that China was on the verge of registering its first population decline since the 1960s—when Mao’s Great Leap Forward was killing more than 30 million people—Beijing’s National Bureau of Statistics hastily issued a one-sentence statement insisting that the country’s population “continued to grow.”¹

Today, the U.S. debate on China focuses on the problems posed by a rising and confident power—the Athens to America’s Sparta, as the tired formula goes. But the United States actually faces a more complex and volatile threat: An already strong but insecure China that views the future with as much anxiety as optimism. Thanks to decades of rapid growth, China has the economic and military muscle to fundamentally challenge America and the international order. But the country isn’t doing as well as it might seem.

For years, China has been experiencing, and concealing, a sharp economic slowdown. It confronts growing political pathologies, worsening resource shortfalls, and an epic demographic catastrophe. Not least, the CCP is losing access to the open, welcoming world that assisted its ascent. China rose so high and so fast from the 1970s onward because it enjoyed blessings unprecedented in the country’s modern history. But now those blessings are vanishing, and China is looking at a hard future of stagnation and repression. Welcome to the age of “peak China.” Beijing is rapidly becoming that most menacing type of revisionist power—one whose window of opportunity has begun to open but won’t stay open for long.

MAKING A MIRACLE

China’s rise has been so phenomenal and sustained that many observers think the country’s ascendance is inevitable. More than half of the world’s people alive today were born after 1980 and have only known a China that was growing relentlessly. But there is nothing foreordained about China’s rise, and CCP officials know it. Beginning in the 1970s, China benefited from a serendipitous combination of five factors: an unusually welcoming geopolitical environment; a leadership committed to economic reform; institutional changes that diluted one-man rule and empowered a professional bureaucracy; the greatest demographic dividend in history; and an abundance of natural resources. Understanding what enabled China’s rise will help us see why its future will be so rocky.

A Welcoming World

In 1969, Mao Zedong ordered four retired PLA marshals to analyze China’s geopolitical situation. It wasn’t good.

China had been locked in hostility with the United States since Mao’s Communists took power in 1949. It had fought two undeclared but bloody wars against America, in Korea and Vietnam. But now a new threat loomed in the north. The Soviet Union, China’s nominal ally, was menacing Beijing as a rancorous split between the Communist powers led to border clashes and the specter of nuclear war. “The Soviet revisionists,” the marshals concluded, had become more hostile than “the U.S. imperialists.”² Over the next three years, Mao quietly explored a marriage of convenience with Washington to contain the common Soviet foe. When Richard Nixon made his dramatic visit to China in 1972, he declared, “This was the week that changed the world.”³ The trip certainly revolutionized China’s strategic position.

China has historically lived in a rough neighborhood.⁴ It occupies a uniquely vulnerable chunk of territory at the nexus of Eurasia and the Pacific that enmeshes it in five complex subregions: Northeast Asia, Southeast Asia, South Asia, Central Asia, and Oceania. The upside of this central location is influence; China is, almost by default, a major player in world politics. The downside is omnidirectional exposure to foreign instability and pressure.

To make matters worse, China’s territory does not naturally hold together. The political core and most of the country’s farmland are concentrated on the North China Plain, a flood- and drought-prone area that suffered several millennia of brutal warfare among dozens, and sometimes hundreds, of warlords. Most of China’s freshwater and harbors are located in the south, where they are separated from the rest of the country by thick jungles and rolling highlands. Many major southern coastal cities have had extended periods where they did more business with foreign merchants than with their ostensible compatriots in the north. Finally, the bulk of China’s minerals and the headlands of its major rivers are located in the west, an area that comprises 75 percent of China’s landmass and consists mostly of desert, tundra, or the tallest mountains on earth. In the past, these regions were vectors for invasion and upheaval. To this day, they are full of minorities that do not consider themselves Chinese and resist Beijing’s rule.

For much of modern history, China’s punishing environment condemned it to conflict and hardship. From the first Opium War in 1839 until the end of the Chinese Civil War in 1949, the country was torn apart by foreign powers, wracked by internal rebellion, and plagued by poverty and famine. China was forced to fight more than a dozen wars on its home soil during this “Century of Humiliation,” resulting in devastation and territorial dismemberment. China also suffered two of the deadliest civil wars in history: the Taiping Rebellion (1850–1864, 20–30 million dead) and the Chinese Civil War (1927–1949, 7–8 million dead).

Even after China unified in 1949, its security situation remained terrible. U.S. intervention against Japan had allowed China to escape World War II with its territory mostly intact. But after Mao’s Communists won the civil war and leaned toward the Soviet Union, Washington responded with a “policy of pressure” designed to subvert the CCP, surround it with military bases, and rupture its relationship with Moscow.⁵ The United States armed and allied with Chiang Kai-shek’s Nationalist government on Taiwan. It imposed harsh sanctions on China, effectively cutting it off from the global economy. During crises in the Taiwan Strait in the 1950s, the United States threatened nuclear strikes against the PRC. Matters worsened when the Sino-Soviet alliance fell apart over ideological disputes and the inevitable frictions between giant authoritarian neighbors. By the late 1960s, the Sino-Soviet border was the most militarized boundary on the planet, and China was surrounded by hostile forces on all sides.

Yet Soviet hostility proved to be a valuable asset for China, because it made possible Mao’s opening to America. That strategic masterstroke did three things that enabled the rise of the China we know today.

First, it turned the United States from a mortal enemy into a quasi-ally. The United States began withdrawing its forces from Vietnam and Taiwan; it started backing China as a Cold War counterweight to the Soviet Union. Henry Kissinger shared sensitive intelligence on Soviet troop movements and warned Moscow that an attack on China would be an attack on America’s vital interests.⁶ When China invaded Soviet ally Vietnam in 1979, the United States again warned Moscow not to interfere.⁷ Thanks to the quirks of Cold War geopolitics, Beijing now had a superpower on its side.

Second, the opening to America fast-tracked China’s integration with the wider world. The United Nations made Beijing, not Taipei, the holder of China’s seats in the General Assembly and Security Council. The PRC began its entry into institutions such as the World Bank and International Monetary Fund (IMF). Country after country switched diplomatic recognition from Taipei to Beijing; Japan, China’s historical enemy, became its largest aid donor. With these new diplomatic connections, China was able to counter-encircle the Soviet Union, forging partnerships with Soviet neighbors stretching from Japan through Iran to West Germany.

Third, rapprochement allowed a breakout from economic purgatory. For the first time, the PRC was able to reduce military spending and focus on economic development. The end of hostility with the West meant access to global commerce and safety for Chinese shipping. China had the best of all worlds—a secure homeland and easy access to foreign capital, technology, and consumers. The greatest oddity of the current Sino-American antagonism is that it was reconciliation with Washington that freed China from perpetual insecurity and immiseration. And the timing could not have been better, because China also had, at last, a government that could exploit this opportunity.

Reform and Opening

Even after the rapprochement with America, Mao remained an immovable obstacle to China’s development. The author of the Great Leap Forward, a man-made economic disaster of the highest order, Mao refused to allow any criticism of his policies. He encouraged a group of CCP radicals (the “Gang of Four”) led by his fourth wife to obstruct any economic or political reforms.

The deadlock broke only when Mao died in 1976 and, two years later, Deng Xiaoping became paramount leader. Deng and a few key advisers understood that the Maoist model of economic autarky and self-induced political chaos was taking China backward. They grasped that saving Chinese “socialism” required embracing capitalism.⁸ The CCP allowed rural communities to run localized experiments by creating loosely regulated village enterprises. Foreign businesses were allowed to operate freely in Special Economic Zones (SEZs) because they would bring money and technology to China.

The reform movement almost disintegrated after the Tiananmen Square massacre, when CCP hardliners sought to roll back reforms across the board. But they lacked a viable economic program to propel China forward. In early 1992, Deng emerged from semi-retirement to conduct a high-profile “Southern Tour” in which he visited and endorsed the SEZs created a decade earlier. Later that year, reformers prevailed at the Communist Party Congress, which endorsed the oxymoronic concept of a “socialist market economy.” In 1993, the CCP approved a broad economic reform program that gave China a more modern legal and regulatory framework and a robust tax collection system.

Foreign investment flooded into China, while a bloated state sector shrank dramatically—from 76 million employees in 1992 to 43 million in 2005—thanks to increased competition and reduced state support.⁹ China’s turn to the market culminated in 2001 with its entry into the World Trade Organization (WTO). Collectively, these measures ignited a period of ultrarapid economic growth, and they were possible only because the Chinese regime was committed to a profound process of reform and opening.

Indeed, China was perfectly positioned for success in a world economy that was changing rapidly. Between 1970 and 2007, world trade surged sixfold. China, with its low production costs, rode the wave of hyperglobalization.¹⁰ China’s trade grew 30-fold between 1984 and 2005. Trade as a share of GDP reached 65 percent, an astoundingly high ratio for a large economy.¹¹ The influx of foreign technology, capital, and know-how turned China into the workshop of the world and lifted hundreds of millions of Chinese citizens out of abject poverty. What sustained this reformist moment, in turn, was the CCP’s willingness to embrace a slightly milder form of tyranny.

A Smarter Autocracy

The CCP has never been anything but authoritarian. It has rarely hesitated to use the most lethal forms of repression when threatened. But not all autocracies are the same, and the CCP’s approach to tyranny has varied over time.

Mao’s tenure represented the apotheosis of one-man rule, complete with the obscene personality cult and wild policy gyrations that accompany an extreme centralization of power. Mao’s successors understood that his model was incompatible with the stability, growth, and innovation the country needed to become a first-tier power. For roughly thirty-five years after Mao’s death, China evolved—haltingly and partially—toward a smarter form of autocracy.

The CCP diluted the power of its paramount leader, who now ruled as something closer to first among equals. The introduction of term limits at the top made it less likely that a “bad emperor” could reign for a generation or longer. In the same vein, political elites emphasized the search for consensus within the party, particularly after Tiananmen Square. The CCP began to reward technocratic competence in the bureaucracy and good economic performance at the local and provincial levels. Politics remained the exclusive preserve of the CCP. But within the one-party system, China’s government became more accountable and less self-destructive.¹²

This change was crucial. It encouraged the inflow of capital and technology by giving outsiders greater confidence in China’s trajectory. It eased the moral qualms that might otherwise have complicated doing business with a dictatorial regime. It helped reassure the outside world that China was changing in ways that would make it less threatening over time. And it produced a degree of relative internal stability that China had not known in generations, laying a strong political foundation for the country’s economic success. All great powers need effective institutions that allow them to exploit their other attributes. After 1976, China’s institutions were effective enough not to thwart the country’s advance.

THE DEMOGRAPHIC DIVIDEND

It helped that China was enjoying the greatest demographic dividend in history. Growth requires people as well as sound policies: A large, healthy working-age population is the lifeblood of economic success.¹³ And for forty years, Chinese demographics were an economist’s dream.

In the 2000s, China had a remarkable ten working-age adults for every senior citizen aged 65 or older.¹⁴ For most major economies, the average is closer to five. China’s extreme demographic advantage was the happy upshot of wild policy fluctuations.

In the 1950s and 1960s, the CCP encouraged Chinese women to bear many children as a way of boosting the working-age population, which had been decimated by years of warfare and famine. Chinese families dutifully obliged, and the population exploded 80 percent in thirty years.¹⁵ In the late 1970s, the Chinese government, now worried about runaway population growth, instituted its policy limiting each family to one child.

As a result, by the 1990s, China had a huge baby-boom generation entering the prime of their working lives with relatively few elderly parents or young children to care for. No population has ever been more primed for productivity. Demographers think this imbalance alone explains a quarter of China’s rapid growth during the 1990s and 2000s.¹⁶

Resources Galore

Finally, great powers need resources. In the early nineteenth century, Britain surged ahead of other countries in part because it had massive coal deposits that fueled its railroads, steamships, and industries.¹⁷ America rose rapidly in the late nineteenth century in part because it had more arable land and internal waterways than any other nation, while its vast oil reserves ignited a transformative manufacturing boom.¹⁸

Today, many natural resources are sold on global markets, but studies still find a strong relationship between resource abundance and wealth.¹⁹ Countries that are packed with arable land, energy, and water reserves are generally rich; countries that lack these endowments are mostly poor. Resource scarcity also leads to conflict: Most wars have been motivated in part by desperate (or greedy) resource grabs.

For much of the past forty years, China was lucky: It was nearly self-sufficient in food, water, and most raw materials. Cheap access to these inputs, plus low labor costs and lax environmental standards, helped make China an industrial powerhouse. Its firms could outcompete foreign manufacturers and dominate industries such as cement and steel. And the fact that China had a relatively pristine environment and untapped resources at just the right moment—the start of the reform and opening period—made the vital difference.

REVERSAL OF FORTUNES

China had it all—just the mix of endowments and environment, people and policies to take off as a great power. But once-in-an-epoch windfalls don’t last forever. During the past decade, the conditions that enabled China’s ascent have deteriorated. Many of the assets that once lifted the country up are fast becoming liabilities weighing it down.

Demographic Disaster

For one thing, China is running out of people—especially the healthy, working-age people that fuel economic growth. Having just recently benefited from an unprecedented demographic dividend, China is now about to suffer one of history’s worst peacetime demographic crises.

Blame the One-Child policy. When China first implemented that policy, it provided powerful economic stimulus by creating a generation of upwardly mobile, relatively unencumbered parents. But the bill is coming due because now there are no children to take the places of those parents. By 2050, the country will only have two workers available to support every retiree (compared to ten workers for every retiree in the early 2000s), and nearly one-third of the country will be over the age of sixty.²⁰ China’s population will be just half its current size by the end of the century and perhaps as soon as the 2060s.²¹ The economic consequences will be dire.

Current projections suggest China’s age-related spending will need to triple as a share of GDP, from 10 percent to 30 percent, over the next thirty years to provide a basic level of elder care—to prevent senior citizens from dying in the streets.²² To put that in perspective, consider that all of China’s government spending currently totals about 30 percent of GDP. China will somehow have to raise this astronomical amount of revenue from a collapsing tax base and a less productive workforce, as it loses nearly 200 million working-age adults while gaining nearly 200 million senior citizens. Not least, China will have to care for its ballooning elderly population without its traditional source of social security: family. The average Chinese thirty-something currently has fifty living cousins—plenty of breadwinners to support grandma. By the 2050s, however, that number will have dropped fivefold. At that point, 40 percent of Chinese under the age of fifty will be only children with few if any close blood relatives, except aging parents that they have to support alone.²³

The Chinese government recognizes the gravity of the situation but is powerless to change it. China’s huge population of soon-to-be senior citizens, and the tiny one-child generation that will have to support them, have already been born. In 2016, China started allowing parents to have two children; the limit was later raised to three. Yet birthrates fell by nearly 50 percent from 2016 to 2020.²⁴ Fewer Chinese babies were born in 2020 than in any year since 1961, when China suffered the largest famine in history and its population was less than half its current size, and the Chinese government expects the birthrate to decline for the foreseeable future.²⁵ (By 2025, according to some projections, sales of adult diapers may outpace sales of baby diapers in China.²⁶) One reason for this slump is an acute shortage of women of childbearing age. The One-Child policy incentivized parents to abort daughters in hopes of having sons.²⁷ Now China is paying the price: China’s population of women in their twenties dropped by 35 million from 2010 to 2021.²⁸ There are roughly 40 million more bachelors than single women of similar age.²⁹ To make matters worse, fewer women are choosing to get married or raise families. Marriage rates fell nearly a third and divorce rates rose by a quarter between 2014 and 2019.³⁰ The brutal fact is that China’s population is about to implode, and that will make sustained economic growth almost impossible.

It will also lead to other problems. Political tensions within China will rise, as an aging population places more demands on a government that is ill-equipped to meet them. Internal violence may surge—a common outcome in societies where there are too many men competing for too few women. The Chinese government might even become more willing to start wars, if for no other reason than to throw surplus men into a meatgrinder. A demographically barren China won’t be nearly as dynamic as it once was—but it may well be more reckless.³¹

Dwindling Resources

China isn’t just running out of people. It is running out of resources, too. China’s impressive economic performance was the very definition of unsustainable growth because the country trashed its environment in the process. As a result, Beijing now has to pay premiums for basic resources, and economic growth is becoming very expensive.

To see what we mean, look at China’s capital-output ratio, which measures the amount of spending required to produce every dollar of output. Countries where raw materials are cheap tend to have low ratios; countries where inputs are pricey have higher ones. China’s capital-output ratio has tripled since 2007, meaning that it now takes three times as much economic investment to generate the same amount of economic output.³² China’s ratio recently surpassed the average ratio in rich countries such as America, a remarkable development given that untapped investment opportunities are usually more abundant in developing than developed countries.³³

China’s environmental crisis can be captured by many statistics. But it is only when one breathes its air and drinks its water that the sheer volume of destruction becomes apparent. Half of China’s river water and nearly 90 percent of its groundwater is unfit to drink.³⁴ A quarter of China’s river water and 60 percent of its groundwater is so contaminated that the government has declared it “unfit for human contact” and unusable even for agriculture or industry.³⁵ China’s availability of water per person is roughly half that of the world median, and more than half of China’s major cities suffer from extreme water scarcity.³⁶ Beijing has roughly the same amount of water per person as Saudi Arabia. This crisis is exacerbated because China remains one of the least efficient users of water on the planet—and because its geography forces it to divert water from the Yangtze in the south to parched cities and fields in the north. Dealing with water scarcity costs China at least $140 billion per year in government expenditures and reduced productivity, a price that will rise with time.³⁷

China’s food security is also deteriorating, the consequence of increasing consumption (a good thing) and the resulting devastation of arable land (a bad thing).³⁸ In 2008, China became a net importer of grain, breaking its traditional policy of self-sufficiency.³⁹ In 2011, China became the world’s largest importer of agricultural products. The government is trying to regain self-sufficiency by heavily subsidizing farmers, but doing so is simply accelerating the depletion of agricultural land. In 2014, Xinhua reported that more than 40 percent of China’s arable land was suffering “degradation” from overuse.⁴⁰ According to official studies, pollution has destroyed nearly 20 percent of China’s arable land, an area the size of Belgium.⁴¹ An additional 1 million square miles of farmland have become desert, forcing the resettlement of 24,000 villages and pushing the edge of the Gobi Desert to within fifty miles of Beijing.⁴² With few options for increasing the food supply, Beijing has turned to belt tightening. In 2021, the government banned binge eating and lavish feasts and started requiring caterers to encourage customers to order smaller servings. Rationing is on the rise.⁴³

Finally, breakneck development has made China the world’s largest net energy importer. Just a decade ago, Americans fretted about their own dependence on foreign oil. Today, Beijing imports nearly 75 percent of its oil and 45 percent of its natural gas, while the United States—thanks to the fracking revolution—has become a net energy exporter.⁴⁴ China’s energy imports cost the country half a trillion dollars each year.⁴⁵ They are also forcing China to take expensive energy security measures such as building overland pipelines through Central Asia and an ocean-going navy that can patrol the Indian Ocean and Persian Gulf. Any interruption in Persian Gulf oil flows would plunge China into an energy crisis far worse than what hit the United States in the late 1970s.

Institutional Decay

A country needs capable and accountable institutions in the same way a computer needs a powerful and efficient operating system.⁴⁶ A good government strikes a balance between authority and accountability; it is powerful enough to enforce laws and get things done, yet it is also accountable to society and treats people equally on the basis of citizenship rather than their political connections.

China could not have thrived since the 1970s without the institutional reforms that gave it better, if perhaps not good, governance. Yet it is hard to preserve indefinitely a system that is simultaneously orderly, accountable, and autocratic.⁴⁷ Under Xi Jinping, China is now sliding back toward neo-totalitarianism, and this deterioration is undermining its economic growth.

China clearly has become more patrimonial and repressive during the past decade. Since taking power in 2012, Xi has appointed himself “chairman of everything,” helming all important committees and doing away with any semblance of collective rule. At the 2017 Party Congress, Xi Jinping Thought—a conscious echo of Mao Zedong Thought—was made part of the country’s guiding ideology. Indoctrination has become more pervasive at all levels of education and in nearly all facets of everyday life; individuals—even business titans and movie stars—who get crosswise with the great leader are simply disappeared from public view. Taking no chances, Xi has packed the highest levels of government with lackeys and has abolished presidential term limits.⁴⁸ In effect, he has systematically stripped away the post-Mao safeguards against one-man rule. Now China is a rigid oligarchy ruled by a dictator for life.

This might not be so bad if Xi was an enlightened economic reformer. But he consistently prioritizes political control over economic efficiency. For example, private firms generate most of China’s wealth, yet under Xi, politically connected state-owned enterprises have received 80 percent of the loans and subsidies doled out by Chinese banks.⁴⁹ State zombie firms have been propped up while private firms have been starved of capital and forced to bribe party members for protection.

To take another example, innovation by local governments spearheaded China’s economic development.⁵⁰ But Xi, in what one insider-turned-dissident calls a “great leap backward,” has accelerated a return to Maoist centralization.⁵¹ His brutal and far-reaching anti-corruption campaign has scared local leaders from engaging in economic experimentation, lest they disrupt the wrong patronage networks and end up accused of malfeasance.⁵² Meanwhile, censorship has silenced independent economists and journalists, making sensible reform and adjustment almost impossible. And Xi’s political work campaign has stifled entrepreneurship. Every company with more than fifty employees is required to have a Communist Party political commissar on staff.

Under Xi, the CCP is crushing dissent and strengthening its grip on nearly all aspects of society. In 2021, his government released a five-year plan imposing severe regulations on every Internet and technology-related sector of the economy, including seemingly nonstrategic industries such as health care, education, transportation, meal delivery, video gaming, and insurance. Companies must hand over their data to the state and can’t get a loan, list overseas, merge, or make any moves related to data security or consumer privacy without Beijing’s blessing and guidance. By the fall of 2021, the country’s largest tech firms had already lost more than $1 trillion in market capitalization as a result of these regulations.⁵³ This is a formula for tight political control—and economic stagnation.⁵⁴

A More Hostile Geopolitical Environment

Finally, the world beyond China is no longer conducive to easy growth. Cold War politics made the Chinese economic miracle possible by giving that country a respite from incessant militarization. But Beijing now faces a different situation.

The turning point, in retrospect, was the 2008–2009 financial crisis. By knocking the United States and many Western democracies on their heels, the crisis also made those countries more anxious about China’s rise. Books with titles such as When China Rules the World, Becoming China’s Bitch, and Death by China became best sellers; Western intelligence agencies predicted that China would overtake the United States as the world’s leading economy. These fears exacerbated growing concerns about China’s rise as a trade juggernaut: According to one study, China’s entry into the WTO cost the United States 2.4 million jobs as multinational corporations shifted labor-intensive manufacturing activities to China.⁵⁵ Beijing was now a potent economic rival, which made it a target of anger as America and other countries entered harder times.

China, meanwhile, emerged from the crisis cocky abroad but insecure at home—a toxic combination. Chinese leaders worried about the sustainability of their growth model, which relied heavily on exports to foreign markets that were now closing up.⁵⁶ This gloomy economic picture put China’s Communist Party in a bind. The party could not allow a sustained downturn without risking political upheaval. Yet it could not implement Western-style economic reforms without disrupting the crony capitalist networks that sustained the party’s grip on power.

To boost growth while maintaining domestic order, the Chinese government decided to crack down on internal dissent and erect protectionist barriers. It engaged in mercantilist expansion abroad, trying to lock up resources, markets, and economic influence through initiatives such as BRI. Powerful interests in the United States and other countries took notice. China’s economic protectionism and mercantilist expansionism alarmed Western business communities. Organized labor, which had never liked the flood of low-cost Chinese imports, clamored for retaliation. In 2012, Republican presidential candidate Mitt Romney promised to punish China for its trade practices “on day one.” Four years later, Donald Trump declared, more graphically, that “we can’t continue to allow China to rape our country.”⁵⁷

Trade wasn’t the only area in which Chinese policies were provoking a tougher response. But for now, suffice it to say that the eventual result was a wave of trade barriers, investment and technology restrictions, and supply-chain movement. The countries making up the Group of 20—the world’s largest economies—hit Chinese companies with more than 2,000 trade restrictions between 2008 and 2019.⁵⁸ Overall, China faced nearly 11,000 new trade barriers from foreign countries between 2008 and 2021.⁵⁹ By late 2020, nearly a dozen countries had dropped out of BRI and another sixteen—mostly Western economic powerhouses—were walling off their telecommunications networks from Chinese influence. The United States and many of its allies imposed severe technology bans on major Chinese companies, denying them critical inputs (for example, semiconductors) and threatening their long-term survival. Today, many countries are actively looking to cut China out of their supply chains. Some, such as Japan, are paying their companies to exit China.

China is losing the easy access it used to enjoy to foreign markets, technology, and capital. The era of hyperglobalization that facilitated China’s rise is coming to an end. And it couldn’t be happening at a worse time.

China’s Economic Quagmire

China’s astonishing economic performance was never going to continue in perpetuity: Growth slows once countries pick the low-hanging fruit of development. The economic formula that allows a country with low wages and vast labor resources to become an industrial superstar is not the same formula that will allow it to make the transition to a mature information-age economy. Yet if headwinds were always inevitable, you might be surprised to learn just how ferocious those headwinds really are. Because of its accumulating problems, the Chinese economy has entered the most sustained slowdown of the post-Mao era—with no end in sight.

Consider one telling statistic: China’s official gross domestic product (GDP) growth rate dropped from 15 percent in 2007 to 6 percent in 2019. That was already the slowest rate in thirty years, and then the COVID-19 pandemic pushed China’s economy into the red.

A growth rate of 6 percent would still be spectacular, but only if it were true. Rigorous studies based on objectively observable data—such as electricity use, construction, tax revenues, and railway freight—show that China’s true growth rate is roughly half the official figure and China’s economy is 20 percent smaller than reported.⁶⁰ Senior officials, including the former head of the National Bureau of Statistics of China and the current Chinese premier, have confirmed that the government cooks its economic books.

To make matters worse, practically all of China’s GDP growth since 2008 has resulted from the government pumping capital through the economy. Take away government stimulus spending, some economists argue, and China’s economy may not have grown at all.⁶¹ Total factor productivity, the vital ingredient for wealth creation, declined 1.3 percent every year on average between 2008 and 2019, meaning that China is spending more to produce less each year.⁶²

The signs of this extended era of unproductive growth are easy to spot. China has built more than fifty ghost cities—sprawling metropolises of empty offices, apartments, malls, and airports.⁶³ Nationwide, more than 20 percent of homes stand vacant, and there are enough empty properties for some 90 million people—a number greater than the entire population of Germany.⁶⁴ Excess capacity in major industries tops 30 percent, with factories sitting idle and goods rotting in warehouses.⁶⁵ Nearly two-thirds of China’s infrastructure projects cost more to build than they will ever generate in economic returns. Total losses from all this waste are difficult to calculate, but China’s government estimates that it blew at least $6 trillion on “ineffective investment” between 2009 and 2014 alone.⁶⁶

The world hasn’t seen such a plunge in productivity from a great power since the Soviet Union in the 1980s.⁶⁷ No doubt, the Soviets had other problems, including sinking oil revenues and sky-high defense spending; and China has additional advantages, including a market-oriented private sector and a growing middle class. But China’s productivity problem is strikingly similar to what afflicted the Soviet Union: state-directed investment piling up in stagnant parts of the economy. China’s private sector is dynamic, but it is shackled to a bloated state sector that destroys more value than it creates.⁶⁸

The unsurprising result of this inefficient system is massive debt. China’s total debt jumped eightfold between 2008 and 2019 and exceeded 335 percent of GDP on the eve of the COVID-19 pandemic.⁶⁹ No country has racked up so much debt so fast in the past 100 years outside of wartime or the mega-shock of the pandemic.⁷⁰ The problem has become so bad that roughly a quarter of China’s thousand biggest firms owe more money in interest than they earn in gross profits. Half of all new loans in China are being used to pay interest on old loans, a phenomenon known as “Ponzi finance.”⁷¹

Many bankers—93 percent, according to one survey—believe that China’s debt is even worse than the above data indicate, because many Chinese companies take loans from shadow banks, whose transactions are not included in official statistics.⁷² In addition, Chinese citizens made rampant use of peer-to-peer lending services on their phones, from roughly 2010 until the government cracked down in 2020, to obtain loans they never could get through regular channels. Such “back-alley banking” severely exacerbated China’s debt problem.⁷³ From 2010 to 2012, Chinese shadow lenders doubled their outstanding loans to $5.8 trillion—a sum equivalent to 69 percent of China’s GDP. From 2012 to 2016, Chinese shadow loans increased by an additional 30 percent each year. China may be sitting on an impressive $3 trillion in foreign exchange reserves, but this amounts to less than one-tenth of Beijing’s total debt.⁷⁴

We know how this story ends: with investment-led bubbles that collapse into prolonged economic slumps. As every country that has followed a similar growth-over-productivity model has discovered, throwing more money into an inefficient system yields diminishing returns. In Japan, it resulted in three lost decades of deflation and near-zero growth. In the United States, excessive lending created the Great Recession. The heavily indebted Indonesian economy crashed in the 1997–1998 Asian financial crisis. China’s bust could be even worse. Beijing’s debt mountain is easily an order of magnitude larger than Indonesia’s was, and it has been relying on an expansion-at-all-cost development model longer than anyone since the Soviet Union. The cascading financial crisis that struck the Chinese real estate development giant Evergrande in late 2021 may merely be a sign of things to come.

This gathering economic storm poses an existential threat to the CCP, which is one reason why the party finds it so hard to kick its potentially fatal addiction to debt. Since the 1970s, the party’s primary source of legitimacy has been the delivery of rising wages and improving living standards. Stellar economic performance has allowed the CCP to present Chinese citizens with a simple and strict social contract: The party retains absolute power while the people receive more wealth—and that’s it. No elections. No independent media. No unsanctioned protests and absolutely no organized political opposition. This basic bargain has made China’s political system strong but extremely brittle, because it only works if the country’s economic engine keeps humming.

Without economic performance, the CCP will have to fall back on its pre-1970 sources of legitimacy: militant nationalism and the regular delivery of beatdowns, imprisonment, and even execution. That system condemned China to chronic poverty, strife, and conflict, so it is little wonder that CCP leaders are determined to rekindle rapid growth.

Unfortunately for them, their options are limited. One route would be to fully liberalize the economy by establishing secure private property rights, allowing free flows of capital and labor, and encouraging greater competition. But history shows that authoritarian regimes are loath to implement liberal reforms. To follow such a path, subsidies to state-favored firms would need to be cut. Access to credit would have to be granted on economic merits rather than political connections. Inefficient state-favored firms would have to be allowed to fail. Free exchanges of information would have to be permitted. Needless to say, such policies encounter fierce resistance from entrenched interests. Case in point: In November 2013, the CCP floated sixty reform proposals designed to transform China’s growth model by allowing markets to “play a decisive role in allocating national resources.” Less than 10 percent of these reforms were ever implemented.⁷⁵

A second route would involve China innovating its way out of its economic problems.⁷⁶ Since 2006, Beijing has tripled spending on research and development (R&D), employed more scientists and engineers than any other country, and mounted the most extensive corporate espionage campaign the world has ever seen. So far, however, these measures have failed to boost flagging productivity. China has developed pockets of economic excellence. It leads the world in some manufacturing industries—especially in the production of household appliances, textiles, steel, solar panels, and simple drones—because low wages and generous government subsidies enable its companies to churn out inexpensive goods. China also has the world’s largest e-commerce market and mobile payments system; it has been developing and rolling out a digital currency. And it holds solid shares of global markets for Internet software and communications equipment—primarily because the Chinese government prevents foreign Internet and telecommunications firms from operating in China, giving Chinese firms, such as Alibaba, Baidu, and Tencent, a captive market of 1.4 billion people.

Yet in high-technology industries, meaning those that involve the commercial application of advanced scientific research (for example, pharmaceuticals, biotechnology, and semiconductors) or the engineering and integration of complex parts (for example, aviation, medical devices, and system software), the story is different. Here, China generally accounts for small shares of global markets compared to the United States, Japan, or major European powers.⁷⁷ The main reason is that China’s top-down R&D system, though excellent at mobilizing resources, stifles the open flows of information and willingness to challenge conventional wisdom necessary for sustained cutting-edge innovation.

Take semiconductors, which are arguably the linchpins of computers and therefore of the modern economy. China has spent tens of billions of dollars trying to become a leader in this area. Yet it still depends on imports of high-end semiconductors and semiconductor manufacturing equipment from America and its allies, a vulnerability that the U.S. government is now using to squeeze Chinese firms such as Huawei and ZTE.⁷⁸ China’s national champion, Semiconductor Manufacturing International Corporation, still relies on subsidies for 40 percent of its revenue (versus 3 percent for U.S. firms) and produces chips that lag those of foreign competitors by half a decade, which might as well be a century in the battle for computer shoppers.⁷⁹

RED ALERT

China’s leaders see the writing on the wall. They know their investment-driven growth model is running out of steam, their people are about to age and die off in huge numbers, their country is becoming a barren wasteland, and their efforts to engineer innovation from the top down may not pan out. They also recognize that a prolonged economic slump spells the end of their country’s rise and, perhaps, of the CCP.

Without sustained economic growth, the gravy train of subsidies and bribes that China’s leaders use to keep powerful interests (state-owned enterprise bosses, local governments, and, above all, the military and security services) in line will grind to a halt. The same goes for China’s ability to buy loyalty abroad. What would remain of Chinese soft power without piles of cash to dole out to foreign partners? Slowing growth also will force the CCP to make excruciating choices between buying guns for the military or social services for an aging population. If China’s leaders prioritize the military over the people, they risk revolt. But if they slash defense spending to make way for social security, they can kiss their dreams of reconquering lost territory goodbye.

As if these dilemmas weren’t vexing enough, China’s leaders also have to worry about their personal fortunes, which are invested in the heart of China’s economy. The party owns almost all of China’s land and roughly two-thirds of its assets, including all of the largest banks and industrial firms. In addition, party members hold executive positions in 95 percent of China’s largest private companies.⁸⁰ A slowing economy threatens not only the CCP’s domestic legitimacy and international clout but also the livelihoods of its 80 million members.

In public, China’s leaders maintain an air of serenity about the economy. Behind the scenes, their anxiety is palpable. Internal Chinese government reports paint pessimistic economic pictures and vividly describe these debt, diminishing returns, and demographic and environmental crises.⁸¹ In 2007, at the height of a years-long economic boom, Premier Wen Jiabao warned that China’s growth model had become “unsteady, unbalanced, uncoordinated, and unsustainable.”⁸² His successor, Li Keqiang, echoed that assessment in 2021.⁸³ And Xi Jinping, the ultimate Chinese triumphalist, has given multiple internal speeches warning of the potential for a Soviet-style collapse triggered by “black swans” and “gray rhinos”—investor jargon for system-crippling economic crises.⁸⁴

The party’s economic apprehension is also evident in what is not said in China, or rather, what is not allowed to be said. Under Xi’s rule, the government has essentially outlawed negative economic news, including unofficial data showing slowing growth, rising local government debt, or signs of declining consumer confidence.⁸⁵ Objective economic analysis is being replaced by government propaganda. And technocrats are being replaced by political hacks: Xi’s government has whittled away the relative autonomy that the country’s central bank once enjoyed.⁸⁶

Many Chinese citizens know that their government’s economic story doesn’t add up, and they are voting with their feet. The rich are moving their money and children out of the country en masse. In any given year, 30–60 percent of Chinese millionaires and billionaires say they are leaving China or have plans to do so.⁸⁷ In the decade after 2008, Chinese nationals received at least 68 percent of all of the “golden visas” in the world, which refer to residence permits obtained by investing large sums in a host nation.”⁸⁸ Chinese laborers have been staging thousands of protests every year demanding compensation for their “blood and sweat.”⁸⁹ It is never a good sign when a country’s elite flee and its workers rise up. As one Chinese tycoon explained after emigrating to Malta, “China’s economy is like a giant ship heading to the precipice . . . without fundamental changes, it’s inevitable that the ship will be wrecked and the passengers will die.”⁹⁰

The worst sign, however, is the exponential increase in Chinese government repression. China’s internal security budget doubled between 2008 and 2014—surpassing military spending in 2010—and has grown a third faster than overall government spending ever since.⁹¹ Half of China’s major cities have been put under grid-style management, a system in which every block is patrolled by a team of security officers and surveilled 24 hours a day by cameras.⁹² Now the government is rolling out a social credit registry that uses speech- and facial-recognition technologies to monitor each of China’s citizens constantly and punish them instantly. That system, the CCP says, will “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.”⁹³

Building an Orwellian police state is hardly the hallmark of a vibrant economic superpower. Neither is the fact that Xi’s top priority since assuming power has been to imprison, execute, or disappear anyone that could conceivably become a political rival. Since late 2012, the authorities have investigated nearly 3 million officials and punished more than 1.5 million others, including a dozen Politburo-level leaders and two dozen military generals.⁹⁴ That amounts to a generational clean-out of the CCP’s upper echelons—and speaks to the paranoia of a regime that knows its economic bedrock is starting to crumble.

Don’t get us wrong: We’re not saying that China is on the brink of economic collapse or that it lacks the money or muscle to pose major problems for the world. But we are saying that the conventional wisdom about China’s ascendance is flawed. Where others see rapid Chinese growth, we see massive debt and Soviet-level inefficiency. Where others see gleaming infrastructure, we see ghost cities and bridges to nowhere. Where others see the world’s largest population, we see a looming demo­graphic catastrophe. Where others see an ocean of Chinese exports, we see vulnerable supply lines and a dearth of domestic consumption. And where others see an enlightened leadership confidently carrying out a master plan for economic supremacy, we see a decadent elite that views China a lot like we do, which is why it is building the most advanced internal security machine the world has ever seen.

Any one of the trends we highlighted in this chapter—surging debt, declining productivity, rapid aging, foreign protectionism, environmental degradation—could derail China’s economy. Collectively, they all but guarantee that China will suffer a severe and sustained economic slowdown. And that slump will shake China’s system to the core just as another threat—strategic encirclement—starts to bite.