Xi Jinping’s China has a serious money problem. It appears that Beijing has a cash shortfall of nearly $900 billion in decreased revenue because of tax refunds, weaker economic production and lost land sales revenue. China will have to borrow vast sums to cover the debt, but its ongoing COVID crisis will continue to undermine economic growth.
The International Monetary Fund has lowered its estimate of China’s GDP growth in 2022 to 4.4 percent. Other estimates project growth as low as 2 percent. Both estimates put China’s GDP growth considerably below Beijing’s official 5.5 percent target — and even further below China’s growth rates over the past several decades.
China still has a massive economy, second only to that of the United States. Nevertheless, heavy investment in state-owned enterprises, infrastructure and real estate mask the nature of the country’s growth. Those investments tend to be less than fully productive, and they generate debt.
Beijing supported the real estate sector for years, because it spurred growth even as it generated debt. Real estate financing and investments became increasingly speculative, however, resulting in a crisis when Evergrande, the country’s largest property developer, and other developers defaulted in 2021, despite reforms that Beijing had announced the previous year. The real estate crisis continues.
At the same time, Xi shifted the government’s support for private enterprise and began backing state-owned enterprises. These are notoriously inefficient and have contributed to Beijing’s mounting debt. Xi also announced his support for more infrastructure spending, which will spur nominal growth but will have to be financed with more debt. And with revenues declining, the size of Beijing’s debt will continue to grow to the point where the government may have to cope with a full-blown financial crisis.
Thus far, it appears that China’s leadership is unwilling to face the debt problems directly. Instead, it has resorted to the blame game. Foreign Ministry spokesman Zhao Lijian attacked the United States for composing supply chain sanctions, which, he insisted, were meant to stunt China’s growth. “The U.S. has actually been stretching the national security concept and flagrantly resorting to illegal unilateral sanctions … and breakage of supply and industrial chains, which severely undermines Chinese companies’ legitimate rights and interests,” he asserted. “This is … unscrupulous suppression and containment. If the U.S. insists on defining China-U.S. relations by major power competition … it will only push the two countries to confrontation and conflict and lead the world to division and turmoil.”
It is true that Washington has taken an increasingly tougher line with regard to its exports to China and to Chinese products that are part of the American supply chain. President Biden has expanded the blacklist of Chinese firms that Washington believes support or are controlled by the People’s Liberation Army. In addition, in December, Biden signed the Uyghur Forced Labor Prevention Act that prohibits importation of goods made in whole or in part in Xinjiang province, which has a majority Uyghur population, on the presumption that these goods were produced with forced labor. The House and Senate have passed separate bills that, once reconciled, will strengthen America’s supply chain significantly and reduce its dependence on China.
The foregoing steps, however, are nothing more than a series of defensive measures against China’s predatory and aggressive economic and military behavior. Beijing will not resolve its economic challenges by blaming Washington. On the other hand, it is entirely possible that Xi — recognizing that the country’s economic doldrums could undermine his chances of winning presidency for life at the upcoming 20th Party Congress — may choose to divert popular attention and stir up Chinese jingoism by further increasing the level of China’s military harassment of Taiwan.
Such behavior may not necessarily improve Xi’s prospects, however. America has demonstrated that it is neither weak nor incapable of uniting the free world in response to Russia’s aggression against Ukraine. Biden’s recent, and generally successful, visit to East Asia indicated that Washington could do the same if China adopts an equally aggressive policy toward Taiwan.
Instead, Xi should face up to the reality that neither an aggressive economic posture vis-à-vis the United States and its European and Asian allies and friends, nor a foreign adventure of any kind, will resolve the diseconomies that plague his country. The sooner he does so, the more likely he will be able to again spur the level of economic growth that catapulted China almost to the top of the international economic ladder.
Dov S. Zakheim is a senior adviser at the Center for Strategic and International Studies and vice chairman of the board for the Foreign Policy Research Institute. He was under secretary of Defense (comptroller) and chief financial officer for the Department of Defense from 2001 to 2004 and a deputy under secretary of Defense from 1985 to 1987.