China welcomes global system failure but risks a fiasco of its own

The Ukraine war is a symptom of the world’s current state, according to Beijing. The director of the European Council on Foreign Relations says China’s leaders “increasingly define their goal as survival in a world without order,” and believe the post-World War II global order “is becoming irrelevant and that attempts to preserve it are futile.” He continues: “Instead of seeking to save the system, Beijing is preparing for its failure.”

The post-World War II world order that is often referred to as the rules-based international order may have been built on international treaties, rules and organizations, but those rules are also largely a reflection of the power of the West in the post-war years. Just look at the balance of power within the United Nations Security Council, the World Trade Organization and the World Bank. Also, Western countries have regularly made a mockery of the very rules to which they are now only too keen to refer in the context of the Ukraine war.

This is one of the reasons why the front against Russia is not as big as it is often portrayed in many media. Only a small minority of the world’s countries enforce sanctions against Russia.  The world order dominated by the West is crumbling. Emerging, generally less democratic countries are gaining more say and there is more fragmentation, disorder and protectionism.

In addition, there are three major differences with the Cold War that make the picture far more confusing and more difficult to predict.

First, the contemporary ideologies of both camps are far weaker. The U.S. capitalist democratic model is being eroded by hypocrisy, increasing inequality and deplorable national politics, among other factors. China does not even really propagate an ideology as such and its governance system is, moreover, not very appealing to people worldwide. All this makes it more difficult to draw states into one of the two camps.

Second, China and America today are not as dominant as the U.S. and the Soviet Union were after 1945. This makes it more difficult for today’s superpowers to impose their will on the world.

Third, Countries have become far more intertwined than during the Cold War. For example, trade between the U.S. and the USSR made up only 1 percent of the total trade of both countries. However, today’s trade between China and the U.S. and the EU accounts for 16 percent of total trade of the latter two.  

In addition, there is currently a consensus in Beijing that America’s aim is to slow down Chinese growth, rather than make China play by the rules. China is, therefore, trying to pursue a two-track policy. On the one hand, it wants to make part of its economy as independent as possible from the rest of the world and be largely self-sufficient. On the other hand, it wants to make other countries and foreign companies heavily dependent on the Chinese market and Chinese products, to the extent that decoupling and de-risking will be made very difficult.

However, as tensions between China and much of the rest of the world keep rising, prospects for the Chinese economy are bad and getting worse. Beijing has many worries, including weakening export opportunities due to lower growth in the rest of the world; attempts by the West (but also by India, for example) to shun Chinese products and companies; towering debts; an unstable property sector; and negative demographics, among other things

Xi Jinping’s progressively centralized, authoritarian, cult-of-personality governance style, which increasingly seeks confrontation with the outside world as well, certainly does not contribute to growth prospects for the Chinese economy.

Initiatives by the West, India and others to exclude China from key industries are gaining momentum. American and European politicians are trying to adopt a more benevolent tone by speaking of “de-risking” rather than “decoupling,” but this is mainly a semantic discussion. The goal remains to rely less on China.

Furthermore, Xi is adopting an increasingly top-down approach when it comes to steering the economy and driving technological progress. Such a dirigiste planned economy may lead to success, but it seems unlikely.

Moreover, new laws on espionage and national security, along with China’s crackdowns on foreign companies, are not very encouraging. Unrest and nervousness among international companies are increasing.

In addition, Chinese consumers remain relatively reluctant to spend. This is at odds with Xi’s desire to make the economy less dependent on exports and more reliant on domestic consumption. But if the social safety net leaves such a great deal to be desired, it is not surprising that the Chinese continue to save a great deal in relative terms to be on the safe side when something bad happens.

The hope is that Xi will make adjustments if he notices that the economy continues to struggle, partly owing to his approach. However, Dan Wang, who is affiliated with China’s Gavekal Group, observed, “Sometimes Xi makes tactical adjustments. But between more growth and more control, he chooses the latter nine times out of 10. For those who believe that he will wake up to the importance of growth, keep in mind that he has spent much of the past 10 years talking down the pursuit of GDP.”

While the global geopolitical picture has become significantly darker, developments within China do not suggest that the growth engine of the world economy of recent decades will surprise positively in the coming years with its contribution to global economic growth and political stability.

Andy Langenkamp is a senior political analyst at ECR Research, which offers independent research on asset allocation, global financial markets, politics and FX, and interest rates.