2023: China in crisis?

Poster: https://chineseposters.net/posters/pc-1958-024, ‘Brave the Wind and the Waves, Everything Has Remarkable Abilities’, 乘风破浪 各显神通, Chengfeng polang gelei shentong, Shanghai renmin meishu chubanshe (上海人民美术出版社), 1958

December 28, 2022_In August 2020 mijngroeve.nl wrote: “seldom do major political transitions occur during periods of economic growth. Political reform is more likely to happen within a system under severe stress. Of course we can’t exclude a coup against Xi or him stepping down if he would run the economy into the ground. But currently there are no signs of economic disaster -the Covid-19 impact notwithstanding- in the PRC, nor of Xi losing his grip on power or planning to scale down his ambitious plans (such as Belt and Road) for his country.”

Fast forward to December 2022: Xi is facing extremely challenging domestic and international circumstances, putting his neo-totalitarian governance system under severe strain. As a result Xi’s performance legitimacy will come under pressure in 2023. At home it will be mostly determined by his level of success in mitigating the risks of the on-going Covid explosion and in reviving the sluggish economy.

Mijngroeve.nl has described over the past years how we have slided into a long term systemic rivalry as well as a long term geopolitical technology war with the PRC. Ultimately, the crux of US-China geopolitical competition is over which country’s social, political and economic system will demonstrate capacity to outperform the other. Both recognize that prestige in the international system will be derivative of performance. Both want to demonstrate their superiority.

At the end of 2022 China is beset by serious problems, mostly due to Xi’s own doing and poor performance. The geopolitical competition manifested itself in Xi Jinping’s Covid policies, which were no longer primarily about fighting the pandemic, but about ideological goals. Xi -as the father of China’s zero-COVID policy- wanted to demo the world that he and his group of loyal scientists knew better than everybody else. It also explains his refusal to accept the Westerns vaccines even though they have proven to be much more effective than his domestic jabs.  The PRC’s sudden relaxation approach to the pandemic has the same impulse as the “zero COVID” policy.  It only aims and serves to strengthen Party control – in spite of the very painful and often terrible consequences for the Chinese population  

Failing Covid policies

The rigid Chinese Covid approach and the U-turn of 3 weeks ago point to severe vulnerabilities and weaknesses in Xi’s governance system and technocratic administration. The WHO has stated that COVID-19 infections were already exploding in China well before the government’s decision to phase out its stringent regime. In other words, things were getting out of control way before the December 7th surprise announcement.

The sudden loosening of the rules by the regime masks this failure of the Zero Covid strategy, which had already triggered strong popular protest in November. Xi and his loyal health experts now have another credibility problem: they all of a sudden have to justify the immediate abolition of the strict Corona rules by downplaying the highly contagious Omicron variant as a minor flue, which has led the population to question why then the rigid zero tolerance approach was needed in the first place. In short, the Chinese government has been caught up in its own web of lies, fantasies and pride.

If the CCP and these so-called scientists had ever cared about the safety of China’s citizens, they would have fostered a transitional period, initiated a comprehensive vaccination campaign, and strengthened the health care system. No such exit strategy has been planned, meaning hospitals, pharmacies and companies have been unprepared. Will anybody believe the official Chinese death statistics claiming zero or mininal deaths related to Covid as many families begin mourning the loss of life? How is Xi going to quickly regain the people’s trust in China’s health authorities?

Another question is how the world will react to Xi unleashing at once a multitude of the infected across the globe from a previously caged China, risking recurrence of outbreaks elsewhere. The pandemic situation in the PRC has again become completely untransparent and Chinese data can’t be trusted.

Economic problems

Meanwhile the economy most likely is in a much more dire state than officials have dared to publicly admit. The sudden and complete reversal in China’s Covid approach means that Xi had a change of heart after finally realizing how economically damaging it has been.  No doubt Xi has begun to fear that the economic slowdown would threaten economic stability and the CCP’s hold on power. Many small private companies have been at risk of going out of business, while  Xi’s crackdown on China’s big tech companies has had a disastrous effect, costing them million in dollars and leading university students to prefer jobs at state companies over promising hi-tech start ups and besieged tech giants.

Unemployment has risen. It is questionable if the PRC will be able to quickly export its way out of its crisis this time: not only will Covid continue to disrupt domestic production, the global economy is suffering because of the war in Ukraine. Western countries are more forcefully pushing the reciprocity principle in their trade relations with the PRC. The tense Sino-US relations are also forcing Western political leaders to redefine and adjust their China policies, which are scrutinized by increasingly critical national parliaments.

Beijing must also have noticed that a number of international companies which had  publicly flirted with the idea of withdrawing or diversifying from business in China have actually started doing so. The PRC still needs these foreign companies and capital irrespective of all the bullish Chinese talk about self sufficiency. The property crisis has evaporated part of the fortunes of at least a segment of the urban rich in China. There is no end in sight yet for this real estate crisis: China’s debt saddled property sector has almost $300B of onshore and offshore borrowings coming due through to the end of 2023, raising the spector of mounting payment pressure following this year’s record wave of defaults. Will Xi be able to quickly reverse the decrease of wealth of the Chinese rich? Economic growth has fallen below 3% in 2022: what will be Xi’s recovery plan to conquer these headwinds? 

Though the public protests against the zero Covid policy were quickly diffused, they do reflect a simmering discontent with Xi Jinping, despite the surveillance and thought control state he has built. Chinese citizens have seen how eagerly and rapidly the government took away all their personal freedoms & privacy during the Zero-covid policies: at least part of the population must be concerned how far Xi’s government would be willing to go in a new crisis situation…    

The China Dream

The China Dream has been Xi Jinping’s ideological cornerstone since his rise to power. This dream has been propagated domestically and internationally as an alternative to the “American Dream,” which empowers the pursuit of individual freedom, identity, expression, value, and prosperity. To maintain credibility and legitimacy, the CCP needs an inspiring national narrative with global resonance.

The 20th Party Congress in October 2022 enshrined Xi ’s Mao-esque cult-of-personality leadership with a third term in order to speed up China’s self-reliance drive for national and economic security reasons. Not only did he get a third term, he hasn’t identified any successor, which signifies that he’s going for a fourth term and maybe more. Xi has buried once and for all the collective leadership principle. He has completely eliminated non-loyalists from the highest ranks of the Party. As mijngroeve.nl wrote last year, the legion of embittered political opponents has grown and a future succession problem looms large.

The anger on display during the public protests in November as well as the growing public distrust of authorities has shown the world that deep disconnects between Xi’s China dream and the dream of at least part of the population can and do exist.

Lack of performance legitimacy

The past 2 years have given us an indication of how counter-productive Xi’s one-man rule has sometimes become and how he regularly manages to shoot himself in the foot. The aggressive ‘wolf warrior’ diplomacy cultivated by Xi has triggered an enormous regional and global backlash. China’s saber rattling around Taiwan and in the South China Sea as well as at the Indian border have led India, Japan and South Korea to sharply increase their defense budgets, accelerate their military modernization plans and seek closer military cooperation with the West, induced the formation of AUKUS, revived the QUAD and resulted in an increase of American arms deliveries to Taiwan and more international attention and sympathy for the fate of the democratic island.

The ‘partnership without limits’ with Russia has put Xi in an awkward pro Russian neutrality position regarding the war in Ukraine, making him an easy target for global criticism that China isn’t doing enough to stop Russian aggression and brutality. While Russia’s growing economic dependency on China will no doubt be viewed as a positive by Xi,  a long drawn out war and a severely military weakened Russia will diminish its strategic value for the PRC. Eventual instability in Moscow or turmoil in the Central Asian republics around China could drive Xi’s paranoia to an unprecedented level. The Sino Russian ‘no limits partnership’ could turn out to be a major strategic miscalculation by Xi if international stability is further endangered by the on-going war. What will Beijing do if Russia will continue to lose on the battlefield?

While the China dream and alternative model for economic development has appealed to – mostly non-democratic- governments in the Southern hemisphere, the PRC is at best a very dubious agent for its own model. For the PRC has benefited greatly from the open liberal democratic international order, from ready access to Western markets and finance, research and advanced commercial technologies, while keeping entry to its own system, infrastructure and market extremely controlled.

Yet through the Belt and Road Initiative China has been encouraging less developed countries to fully open their economies, markets and critical infrastructures to the party-controlled and highly securitized economic system and operations of the PRC. Last but not least, China’s economic woes could heavily impact Chinese foreign investments and BRI related projects as well as affect the on-going debt restructuring efforts for countries who can’t repay Chinese loans, again undermining the attraction of the global China dream.

Xi’s conundrum

Xi’s crackdown on Chinese tech-companies also begs the question how he thinks he can meet one of his key strategic goals i.e. to become  a fully modernized military and global innovation leader by 2035. China has few short-term remedies for its leading firms getting cut off from U.S. chip technology and Dutch and Japanese semiconductor equipment. Xi’s belligerence has led to more Western discussion and coordination on export controls for sensitive technologies and restrictions on common research projects with the PRC.

How is Xi’s China going to achieve technological self-sufficiency under these circumstances?  

A more intensive collaboration between like-minded democratic countries triggered by the China challenge is likely to spur on innovation and help us to better compete against the PRC. South Korea and Taiwan’s technology development went hand in hand with democratization of their societies, resulting in phenomenal  economic development and productivity growth, culminating in their major advancement in the global value chain. Xi’s authoritarian China is trying to prove the same can be achieved by thought control, cracking down on private tech companies, centralizing technology development under state guidance and by selective engagement with the West.

While the final verdict on his approach is still out, mijngroeve.nl believes the odds are not in Xi’s favour. It wasn’t mercantilism, marxism or neo-totalitarianism that expedited technological progress, raised living standards and empowered citizens. It was the human instinct for capitalist ambition —well-managed and tamed by democratic governance in the most successful cases. After Deng Xiaoping opened up China in 1978, the Chinese population has shown to possess this instinct in abundance-yet unfortunately the CCP will in the end always consider empowerment an existential threat to the survival of the Party. Ultimately it is the CCP itself that forms the key obstacle for China to become a truly innovative and respected global power, whose citizens can freely share their experiences and know-how with the rest of the world for the public good, not just for the sake and glory of the Party.

Political transition?

Does that mean that the Chinese Party state is going to implode in 2023? That’s unlikely. Despite all their frustrations a big part of the population seems still willing to give the communist regime the benefit of the doubt because the past 20 years have produced a tremendous increase in living standards. Part of the public also seems to buy into the nationalistic and revisionist historical propaganda which extols the moral superiority of the Chinese civilization, justifies Beijing’s territorial claims on neighboring border areas, seas and mountains and decries how the ‘neo-colonial US’ is  deliberately blocking the great rejuvenation of China. Xi has just cemented his position as the all powerful leader of China despite those 2 years of poor performance, meaning that the Party elite does strongly support his overall approach, vision and mission. There are no signs of any fundamental change in the highly personalized, abrasive and authoritarian governance system that Xi has brought about.

Perhaps only if the Chinese elderly would be dying in high numbers and mass hospitals would continue to be overwhelmed, a level of anger could arise that could produce big protests against the failure by Xi to prepare for a health crisis. Or if the economy would be about to completely tank. But without such a clear motivating or mobilizing factor, it’s unlikely people will go out on the streets again knowing the risks for personal reprisals are very real.

The biggest conundrum for the Chinese President is how to control the Party in case of a continued lack of performance. Lacking credibility, lacking confidence from the people or authority among the population is Xi’s biggest vulnerability. The CCP shares this same biggest vulnerability as Xi. Only if this legitimacy would diminish rapidly, Xi and the Party would get into severe danger. 

In 2023 we can expect the Chinese propaganda machine to go into overdrive to glorify China’s leader, ambitions and accomplishments: any lack of performance will be concealed or denied or attributed to fake news and machinations of foreign powers. If ever Xi would be put on the defensive for lack of performance, his propaganda apparatus will pump up the volume praising his virtues and achievements.

Short term outlook

In 2023 we can also expect major charm offensives by Xi, in particular to the key European countries and its leaders, because the President is convinced he can use Europe’s desire for ‘strategic autonomy’ to drive a wedge between the US and Europe. He is probably also convinced these leaders again need China to stabilize their own troubled economies.

Xi will tell Paris and Berlin that China and Europe have “no fundamental strategic differences and conflicts” and “systemic rivalry is non-existent”, and that the People’s Republic is fully open for European enterprises. He will urge Macron and Scholtz to reject ‘decoupling’ and re- invest in the PRC and be fair to Chinese businesses. Beijing will for sure re-approach European groups most interested in moving towards a full normalization of economic ties, i.e business executives and political elites confident of their ability to balance short-term profits and that desired European ‘strategic autonomy’ with the very real negative security implications of re-strengthening and even enlarging economic ties with China. However, as mijngroeve.nl has argued since its inception, the discussion about our relationship with China is not just a commercial or trade matter, it touches upon our security, transatlantic relationship and values too.

Over-dependence on resources of China and the Chinese market has made us vulnerable and we should not allow it to continue for the sake of companies who want to maximize their profits and fail to implement risk mitigation policies unless they are told or stopped by their governments. While the EU has declared China a system rival, it often gives the impression not to know what consequences to attach to this conclusion. This declaration should have produced national debates in all EU member states, which should have led to a coherent and comprehensive European China strategy, to be carried forward by France and Germany in unison. Though European leaders have finally dropped their naivety towards Beijing, a coordinated EU China policy is still hard to distinguish, undermining the EU’s intention and ambition to be an influential geopolitical actor. 

Open channels

It’s of course critically important to maintain open channels of communication between China and the U.S and China and Europe. In that communication it’s also crucial to identify areas and initiatives where cooperation is in principle still possible, think debt restructuring in third countries, climate change, global health management. Despite all the tensions and doom, it’s essential to keep alive at least some positive agenda points with Beijing.

For even as the systemic rivalry has come into clear focus we must find ways to coexist. The vast majority of citizens of China and the rest of the world look for the same things: material and physical security, opportunity and a better future for posterity. As China may at times seek to improve diplomatic ties the US and the EU should try to capitalize on such instances to achieve verifiable commitments from Beijing on issue specific dialogues. The engagement with China should focus more on immediate and concrete gains in areas of common interest. The systemic rivalry isn’t a zero sum game by default.

China has been advocating for itself a role of leadership in the world, as a responsible superpower. It has been looking for respect and recognition and often behaves as an aggrieved power looking for ‘its rightful place’ on the world stage. Hence the US and Europe should continue to request the PRC to play a more active role in restraining Russia’s behavior in the war in Ukraine, to assist in guaranteeing global food security and to help enhance environmental protection and stabilize the global economy. This would offer the PRC an opportunity to showcase its repeated promises to be a responsible global player, while simultaneously providing a route to a de-escalation of tensions with the US. 


Yet it is also important not to let ourselves be fooled by Beijing’s new charm offensives and keep in mind Xi’s main messages delivered during the last Party Congress and his long term goals. President Xi presented an extremely gloomy view of the international environment. He again warned his population to be ready for a long struggle towards the rejuvenation of the nation, saying that external attempts to blackmail and contain the PRC would be increasing, but not deter communist China from achieving its goal. Not surprizingly security and self- reliance were again predominant themes in his speech. At the same time he clearly outlined China’s model as an alternative to the West; politically, economically, as well as globally.

To repeat: Xi’s focus on the role of the Party, industrial policy and Chinese style modernization presents an idea of an international order that vastly differs from the one we have been used to. The past 2 decades have proven that an ‘open’ tyranny is apparently even better at deceiving the Western audience than a very closed tyranny under Mao Zedong. During these recent decades, major Western businesses heavily invested in China and together with politicians frequently painted a very rosy picture of China to the outside world, while downplaying the very ugly sides, the structural problems and political and strategic goals of the Chinese communist regime.  

In the battle of the narratives the democratic countries need to promote and stress that  economic openness and market-based solutions are best for global prosperity and security, with government interventions such as industrial policies and export controls as exceptions. They also should live by their own principles, which means a new wave of protectionism and a race to the bottom on subsidies should be averted by the EU and the US. The West needs to demonstrate the resilience of its democratic societies and prove that the extreme nationalistic, protectionist and populist storms that have been plaguing them since many years can and will be overcome. .

Long term

In 2020 mijngroeve also wrote: “As for the longer term, the West should face up and deal with the realities of China’s rise, its external behavior and global strategy. The crucial variable regarding whether China will be successful in its strategic goals will be the democratic world’s domestic, economic, military and diplomatic strength and resolve, and not just Chinese actions.

The EU should also anticipate a very likely scenario in which a long term confrontational relationship between the US and China, controlled by a form of managed competition to avoid conflict and to allow for limited cooperation, will be the maximum achievable outcome”. 

Xi has a broad sense of China’s desired future, but the shape of its precise elements and what he is exactly prepared to do for it, are not always clear: it remains a work in progress, prone to opportunistic, pragmatic, sudden and contradictory adjustments and changes if required to keep himself and the Party in power. President Xi is ruthless, overconfident and arrogant, yet at the same time very insecure and paranoid. Western leaders should prepare better for more erratic decision-making in the world’s second-largest economy, Xi’s poor track record of the past few years speaks volumes, and that was even before he only surrounded himself with yeah-sayers….

A scenario of managed competition currently looks the best we can hope for.  But in that scenario we’d better also take into account a situation in which a prolonged period of  underperformance by Xi will make the management of this competition even far more complex as there could be a big discrepancy between what China wants the world to believe and what it is really accomplishing. There could be a growing gap between China’s stated ambitions and its actual achievements, between Xi’s dream and his population’s desires and frustrations. Yet Xi’s propaganda machine will no doubt aim to keep Xi’s China dream narrative alive via an even more intense, concerted and relentless PR effort targeted at a domestic and global audience.

To separate facts from Chinese fiction will be essential in the battle of narratives and in defining the EU’s China approach, also in order to avoid misreading of China’s true motives and capabilities in this new era of managed competition between the US and the PRC.

Refer also: