China is courting the next Tesla to save its troubled economy

Xi Jinping has recently been meeting with American business and academic leaders. This trend has become characteristic of his leadership style over the last year. With each meeting, Xi has meticulously laid out China’s rosy economic prospects, underlining the nation’s steadfast commitment to reform and opening up, all to attract more foreign investment. 

Whether he is meeting with Bill Gates, Elon Musk or Stephen Schwarzman, Xi consistently emphasizes a key concept: The hope for U.S.-China relations lies in the people. What he really means is that the hope for Sino-U.S. relations lies in the business community.

In contrast, interactions with American officials last year, including Secretary of State Antony Blinken, were far less warm. China’s response was notably reserved; it declined communication with the U.S. military. Presently, Chinese media remains filled with criticisms of the U.S.

Against this backdrop, one might question the apparent favoritism towards the American business community. It could indicate that Xi Jinping has recognized the limitations of relying on China’s domestic resources and partnerships with developing nations to tackle economic challenges.

Consequently, Xi is again looking to Western technology, investments and markets for support. However, instead of directly engaging with Western governments, he aims to leverage the influence of the business sector to achieve his goals — a strategy that has historically yielded better results.

Several chronic problems with China’s economy prevent almost any policy from effectively altering its trajectory. One is China’s demographic landscape. China’s population experienced negative growth in 2022 for the first time in six decades, with India surpassing its population size around May 2023.

The one-child policy of 1971 resulted in a significant decline in birth rates, which have steadily declined since the 1980s, despite policy adjustments such as the two-child policy of 2013 and the lifting of all childbearing restrictions in 2015. This demographic trend is irreversible and expected to persist for at least two to three decades, regardless of the policies implemented by Beijing.

The combination of a decline in the labor force and reliance on outdated, labor-intensive industries presents a considerable challenge for China. In response, the country must transition to an economy driven by technology and innovation to maintain competitiveness on the global stage.

One such hope is China’s three new markets: electric vehicles, lithium batteries and solar panels. China’s electric vehicle exports surged by 77 percent last year. In 2022, CATL, a Chinese company, held a 37 percent market share in global power battery consumption for six consecutive years. Additionally, China’s solar panels dominate at least 80 percent of the global market. China sees these sectors as potential replacements for the declining real estate industry.

However, the future of these Three New markets is uncertain, partly due to changes in the international EV market. For example, in February, Mercedes-Benz announced it won’t fully switch to EV sales in major markets by 2030. Instead, it will continue to develop fuel vehicles in the next decade. Additionally, General Motors and Honda ended a partnership to produce affordable EVs.

Western governments are also wary of Chinese EV sales. In February, President Biden ordered an investigation into foreign-made automotive software to stem the influx of Chinese electric vehicles into the U.S. market. Likewise, the European Union is cautious of China’s EV exports and may impose duties if they benefit from “illegal subsidies.” Moreover, a potential reversal of net-zero goals in the U.S. due to a change in administration could spell disaster for China’s three new markets.

For Chinese EV manufacturers to thrive, they must enter the European and American markets on a large scale. While China’s EV industry has grown rapidly, it operates at a loss and relies heavily on state subsidies, which have ceased. Therefore, Chinese manufacturers must significantly increase sales to improve efficiency. The industry will struggle to sustain its rapid development without access to Western markets.

Furthermore, the three new markets only contribute 8 percent to China’s GDP, making it nearly impossible for them to compensate for the decline in real estate, which accounts for one-third of GDP.

Lastly, despite ample liquidity in the system, China’s economic activity remains subdued, reflecting a pervasive lack of confidence in the economy’s future trajectory.

China urgently needs to secure Western technology and investment to stabilize its economy. In Beijing’s view, Tesla is a prime example of such mutually beneficial aspirations. The entire EV industry in China owes a great deal to Musk. His open-source technology facilitated the growth of China’s EV industry from nonexistence to prominence at minimal cost. Moreover, Musk’s establishment of factories in China spurred the growth of the entire EV industry ecosystem in the country. Meanwhile, the factory in Shanghai has become Tesla’s largest revenue source.

While replicating such successes would be desirable, Tesla remains an exception rather than the norm in today’s China. Many businesses, lacking entrenched interests tying them to China, are increasingly wary of the country’s deteriorating economic fundamentals and skeptical about its long-term economic outlook.

Simone Gao is an independent journalist in the U.S. and host of Zooming in with Simone Gao.