Xi Jinping's Path for China

Editor's Note: This article is written by a member of Stratfor's Asia-Pacific team and is informed by their most recent visit to China. 

This is not a huge surprise. Escalating U.S. trade attacks have exposed to the Chinese public the gap between China's real and perceived levels of development, and they have also coincided with the country's slowing economy. This has intensified anxieties over China's future among elites and even in the public discourse. And these anxieties have manifested in rarely exposed policy divisions within the government. Economic policymakers are debating the right balance of fiscal policies to lead the country through a period of increasing economic stress. And ahead of China's annual informal Beidaihe meeting, where political leaders discuss key policies, there have been leaks to the rumor mill about the Communist Party's internal politics. Over the past three years, such leaks were largely muted, indicating strong political alignment throughout the party. But things appear to be changing.

See China in Transition

China's failed trade talks with the United States in May and the resulting escalation of tensions have prompted skepticism about Xi's close ally Liu He, who was responsible for managing the negotiations. There are also suspicions about whether Beijing had underestimated Washington's determination to achieve a "fair trade" agenda with China, and whether domestic economic policies — also dominated by Xi and his allies — were too slow to respond to this threat. Indeed, until recently, China's economic policies remained heavily focused on deleveraging its debt-ridden system — which can be seen as a move to suppress growth — and increasing default risks among corporations and local governments at a time when the risks associated with a trade war loom.

Xi's campaign for a more proactive and expansionist foreign policy also faces criticism. Some have accused the Communist Party's propaganda system of overemphasizing China's strength abroad, thus inviting pushback from global powers wary of China's intentions. Those within the country who worry China has gone too far in its global expansion efforts have suggested that it might benefit from a return to Deng Xiaoping's dictum of hiding China's strength and biding its time.

At the center of everything is the president. Since taking office, Xi has arguably made himself the most powerful ruler since Mao Zedong, and he sits at the apex of China's entire economic and political strategy. Until now, Xi has largely managed to insulate himself from direct attacks, but that may not last forever. Domestically, he has already faced down opposition from political stalwarts and intellectuals over his attempts to enforce ideological and social conformity as well as his controversial decision to extend presidential term limits. Any perceived policy failures could bring simmering threats from political opponents (and victims) back to the surface.

So how did China get here, and why? Since the beginning of his rule, Xi sought a very different path than his predecessors for shaping China. Internally, he has taken bold steps to rebuild his country's trade- and debt-driven economy and reshape the elite political system from a communal structure to one ruled by a strongman. Internationally, he aspires to shift the country from a passive global player into a strong and assertive power. Each of these changes, however, come with the risk of miscalculations and unintended consequences that could eventually endanger Xi's own position of power.

Every dynastic ruler in China's more than 2,000 years of history has faced the same struggle: to unify and govern an insurmountably vast and disparate landmass under a centralized authority. Xi is no exception. The president came to power with a clear understanding of his country's historical cycles, as well as its associated strengths and pitfalls. He drew from his knowledge of China's past glory, its "century of humiliation" starting with the first Opium War in 1840 and his personal experiences during the chaotic Cultural Revolution half a century ago. He has done little to hide his aspiration of giving China a critical place in the global order once again.

But though Xi may have had a clear goal informed by his historical knowledge, the realities of his rule have also been shaped by his country's present situation. And the fact is that he came to power during a time when China was sitting at a major crossroads — not only in regard to its domestic political and economic situation but also the structure of the global world order. These realities have fundamentally compelled and constrained his actions in equal measure, regardless of his intent.

On the economic front, massive debt risk and industrial overcapacity loom over China, in large part a result of the credit and infrastructure boom that the country experienced after the 2008 financial crisis. And after six years of relatively stable growth of around 7 percent, the economy is finally taking a hit, because of its own battle against debt and the trade war with the United States. Moreover, domestic consumption has yet to live up to expectations, and Beijing's dream of a nation with cutting-edge technological capabilities remains at least a decade off.

Even so, it's easy to understand Xi's desire to make big changes to the Chinese economy, and the yearslong process of restructuring and upgrading has produced some positive results. If the country had continued its credit-and-investment driven path for the sake of maintaining rapid growth, it could have been paralyzed by much higher financial risks and many of the other challenges that still confront the country right now — from environmental degradation to suppressed domestic consumption. And, if China was facing the current U.S. tariff threats with the economy it had a decade ago, it would be in much worse trouble. The country has succeeded in easing its reliance on trade, which went from representing 37 percent of China's gross domestic product in 2008 to less than 20 percent today. And Beijing's service-based employment rates rose from 23 percent of total employment in 2008 to 45 percent now. Both these numbers suggest China is in a better place to weather a trade blow than it was ten years ago.

Taking a broader view, today, China's economic, cultural and political reach is global.

The country is second only to the United States in outbound foreign direct investments and aid, while projects such as the Belt and Road Initiative have put Beijing at the forefront of infrastructure development in the developing world. At the same time, the country has expanded its military presence abroad, contributing significant numbers of troops to U.N. peacekeeping missions. It just established its first overseas naval base in Djibouti, and has begun testing a more proactive foreign policy from the Middle East to Africa.

China is now facing external pushback for its aggressive international engagement, but when Beijing started making these decisions, it was facing both domestic pressure to adopt a more assertive global role (in order to secure its expanded economic interests) and international pressure to take greater responsibility for global affairs. In other words, China was essentially being asked, by voices within and outside the country, to test its diplomatic, economic and military outreach.

Of course, Xi is not solely responsible for making all the changes that have brought China to where it is today. But what he did was take control of China at a time when the country was facing two possible futures: maintain the inertia of nearly three decades of risky, expensive pro-growth policies that rely on external players, or urgently try to move away from that model in service of a more stable future, with the associated with risks and costs. And Xi made a decision.

Xi has chosen not only to alter the course set by previous Chinese leaders but, in some cases, is taking much bolder steps to accelerate China's transformation into a different type of country. With all the risks and resistance to that transition in mind, Xi has pursued a much stronger, more centralized political system. As a result of massive institutional overhauls, ruthless crackdowns and internal rectifications, Xi has rewritten the internal elite politics that was grounded on three decades of collective leadership.

However, Xi inadvertently created an inherent paradox: on one hand, the challenges and costs of such a major transformation require an extremely powerful political ruler. But on the other hand, the very dictates that enshrine him with absolute power in times of stability could easily put him at peril when the momentum shifts and obstacles arise. Having implemented a more personality-driven political system, Xi becomes far more accountable for failures than previous leaders, and in doing so makes the Chinese government system more vulnerable to policy miscalculations.

Over the past five years Xi's mechanism has worked relatively well — at least, in a fairly stable environment, but as external and internal challenges add up, cracks will begin to show.

The trade war, for example, is testing the Chinese leadership's policy preparation. Its slow response soon revealed domestic economic challenges and financial stress across the board. And if the U.S. government employs even more aggressive trade assaults, China would experience greater economic instability and Xi would face ever more political backlash. Externally, Beijing must now manage Washington's powerful desire to contain China. The shifting global strategic environment is driving the need for a rapid change in China's foreign policy posture.

Did Xi and his team underestimate the risks? This would help to explain Beijing's apparent lack of preparation for the trade war with Washington and its slowness in recognizing the strength of U.S. President Trump's resolve to balance China's power in his favor.

To deal with external threats, Chinese society and leadership understand they will need to become more cohesive. New and unforeseen problems will test the resilience of Beijing's policies and Xi's power, and the new system may well be forced to accommodate or adjust in return for that coherence.

Still, even if China engages in some sorts of "strategic withdrawal," the country is too far along this new path to dial back completely. The stage of its economic development, its extensive global engagement and its very ability to challenge U.S. supremacy means China will only face more strategic competition from other powers in the future.

This article appeared originally at Stratfor Worldview.