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Spy Balloon Fallout Highlights Fragility Of U.S.-China Relations

  • Xi has promoted an economic strategy of "dual circulation," emphasizing self-reliance and leveraging the country's massive market to generate GDP growth.
  • US-China relations are heading towards an irreversible downward spiral, with Washington sanctioning more Chinese firms with alleged ties to military intelligence.
  • President Biden has been criticized by Republican members of Congress for being too soft on China and may be inclined to further strengthen the U.S.'s "anti-China" containment policy.
Spy Balloon

While President Xi Jinping has often been criticized by Western politicians, as well as intellectuals inside and outside of China, for restoring quasi-Maoist values, he has at least been consistent in his conservative agenda. On foreign policy, he has never strayed from the Chinese Communist Party’s (CCP) claim that “the East is rising and the West is declining.” Furthermore, Xi’s keen support for the Vladimir Putin regime is central to his efforts to form a kind of axis of autocratic states comprising China, Russia, the Central Asian states, Pakistan, Iran and even North Korea. This “axis” is deemed a potent weapon to beat back the “eastward expansion” of NATO, as well as what Beijing perceives as U.S. attempts under the Biden administration to establish an Asian NATO consisting of American allies and friends, including Japan, South Korea, Australia and the ASEAN countries that have territorial disputes with the People’s Republic of China (PRC) (RFA Chinese, December 15, 2022; RFI, February 28, 2022).

Domestically, since 2020, Xi has promoted an economic strategy of “dual circulation,” which entails a mixture of autarkic “internal circulation” accompanied by “international circulation”—a continuation of China’s decades-long efforts to lure foreign investment and technology (China Brief, September 9, 2022). Yet, as Xi’s Political Report to the 20th Party Congress made clear, the PRC is increasingly emphasizing self-reliance and seeking to leverage its 1.4 billion-person market in order to generate annual GDP growth of at least 5 to 6 percent during the Xi era, which is expected to last until at least the 22nd Party Congress in 2032. The supreme leader is particularly eager to wean the high-tech sector off of its reliance on key components and know-how from the U.S. or its allies (Gov.cn, February 6; VOA Chinese, October 20, 2020; BBC Chinese, August 10, 2020).

Demise of “Smile Diplomacy”

After consolidating his status as “leader for life” at the 20th Party Congress last October, the 69-year-old Xi, who is also CCP General Secretary and Commander-in-Chief, seemed to have shifted gears. Starting with his November 2022 meeting with President Biden on the sidelines of the G20 conference in Bali, Xi and his top aides adopted a form of “smile diplomacy” in an apparent effort to entice Western investors (New York Times Chinese Edition, November 15, 2022; The White House, November 14, 2022). Attempts have also been made to at least restore regular high-level visits between the PRC and the U.S. In the wake of Beijing’s unexpected ending of zero-COVID lockdowns and quarantines on December 7, mutual travel between China and several Western and Asian nations has resumed. Last month, Xi also sent his senior economic advisor, outgoing Vice-Premier Liu He, to the Davos World Economic Forum in Switzerland to emphasize that “China is back” to playing a key role in the global economy (Gov.cn, January 17; Deutsche Welle Chinese, January 17).

In early February, however, the Xi leadership seems to have suddenly reversed course on both its foreign and domestic policies. After the detection of PRC “spy balloons” overflying North America as well as Latin America —and the shooting down of what Beijing claimed to be a “civilian airship” by the U.S. military on February 4—the Chinese Foreign Ministry switched back to its infamous “wolf warrior” diplomacy (Xinhuanet, February 5). Foreign Ministry spokesperson Mao Ning blamed Washington, saying that the “U.S. side’s deliberate hyping up of the matter and even use of force are unacceptable and irresponsible”( PRC Ministry of Foreign Affairs, February 6). In response to Secretary of State Antony Blinken’s postponement of his visit to China, which was agreed upon during the Biden-Xi meeting in Bali, Beijing went so far as to deny that the Chinese side had ever invited America’s top diplomat to visit (VOA Chinese, February 8; BBC Chinese, February 3). There seems little doubt that the global image of China has been dented as a result of these developments.

The U.S. government has briefed 40-odd countries about the recent history of PRC “spy balloons” gathering intelligence within their jurisdictions. Officials in key US allies, from Germany to Japan, have expressed indignation at these espionage activities. There is growing suspicion among the U.S. and its allies that President Xi might be seeking to play the so-called “Russia card” by visiting Moscow in the coming month or so. In Moscow, Xi might raise the possibility of boosting aid to Russia as a threat to the Western alliance (French Radio International, February 8; People’s Daily, January 1). During his visit to Moscow in early February, Vice Foreign Minister Ma Chaoxu said both sides would “push forward China-Russian relations to an even higher level.” (Netease.com, February 7; Australian Financial Daily, February 4).

An obvious factor behind Xi’s about-face in both foreign and domestic policies could be Beijing’s perception that the U.S. and its allies in both the EU and Asia are upping the ante in their efforts to isolate China on multiple fronts. NATO Secretary Jens Stoltenberg’s recent visit to South Korea and Japan aroused fears within CCP leadership that an Asian NATO may be in the offing, especially with defense spending rising and countries across the region, including Japan, South Korea, India, Australia, Vietnam and the Philippines, increasing their security cooperation with the U.S. Most worrisome for Beijing is Tokyo’s decision to augment military spending in addition to forging defense agreements with the U.S., U.K. and Australia (Sina.com.cn, February 1; Deutche Welle Chinese, January 31). These deals would allow the reciprocal stationing of troops between Japan on the one hand, and the U.K. and Australia on the other. The U.S. forces have also beefed up their defense capacity and operations in Okinawa as well as the Ryukyu Islands that lie close to Taiwan. U.S. forces have also won permission to station troops in four strategic locations around Philippines (VOA Chinese, February 9; BBC Chinese, February 3). Given that most U.S. allies are opposed to Russian expansionism, Beijing’s “playing of the Russian card” could very well backfire.

Modernization Minus Westernization

Even more surprising than the Xi leadership’s apparent revival of “wolf warrior” diplomacy is the new impetus that the “ruler for life” has given to reviving the late Great Helmsman’s penchant for prioritizing “self-reliance” in economic policymaking. During a recent speech to the Central Party School, Xi noted that “Chinese-style modernization is a new model for human advancement, and it dispels the myth that ‘modernization is equal to Westernization’” (People’s Daily, February 7; Gov.cn, February 7). Xi did not reference further opening up the country to Western or East Asian countries, but rather cited the need for efforts to “expand the channels for developing countries to achieve modernization and to provide a Chinese solution to aid the exploration of a better social system for humanity.”

Due to the fact that the Chinese economy has for decades relied mainly on injections of state capital into the housing and infrastructure sectors, government spending on gigantic projects has led to unprecedented levels of debt sustained by different levels of government administration, state-owned enterprises (SOEs), as well as private conglomerates such as property giant Evergrande. While the State Council has since late 2022 instructed state banks to pump more money into infrastructure, overleveraged property giants are told to use the funds mainly to finish uncompleted buildings that have already been sold to consumers. Obviously, this overdependence on state-financed infrastructure building has proven to be a questionable tool for economic growth and reform (South China Morning Post [SCMP], January 5; Globalconstructionreview.com, August 7, 2022).

Xi’s novel approach to economic growth, which is officially known as the “new development pattern” (?????), largely focuses on two related strategies: boosting domestic consumption, particularly consumer spending by members of China’s estimated 400 million middle-class citizens, and building a “unified national market” (???????) under the meticulous guidance of the CCP. Details on the “new development pattern” were spelled out in a Politburo study session on February 2 (China Daily, February 2; News.cn, February 1). Perhaps owing to his ill feelings toward the U.S.-led boycott of cutting-edge sectors such as semiconductors and AI, Xi’s “new development pattern” emphasizes not so much infrastructure or advanced technology but the development of a “unified national market” driven by consumer spending, government stimulation of SOEs and indigenous innovation in certain technological fields. Although exports were one of the few areas in which the Chinese economy performed relatively well in 2022, Xi has had little to say about enticing foreign investment or undertaking economic liberalization (China Daily, January 14; Gov.cn, January 14). Rather, the focus is on autarkic “internal circulation.”

Since early 2022, the Xi leadership has earmarked enormous resources to buttress domestic consumption and galvanize a “unified national market” (Chinabriefing.com, April 22, 2022). In a February 2 Politburo session, the paramount leader said it is necessary to “expand domestic demand” by “boosting the people’s consumption, so that they so that they can consume with a stable income, dare to consume without worries, and are willing to consume due to the excellent consumption environment and strong sense of having gained” (News.cn, February 2). This is a tall order given the lackluster GDP growth of merely three percent last year, with consumer spending dropping 0.2 percent from 2021.The annual household disposable income growth rate fell to 8.39 percent from 2013 to 2022 from the average rate of 11.04 percent from 2001 to 2012  (Foreign Policy, February 2; CNBC.com, January 30). Wages in Chinese cities rose just 2.2 percent in inflation-adjusted terms in the first nine months of 2022, less than half the rate that prevailed before the pandemic. Youth unemployment reached almost 20 percent. Household debt as a percentage of GDP rose from 61.2 percent in the third quarter of 2022 to 61.9 percent in December 2022 (Ceicdata.com, January 1). As much of these household borrowings are used for paying off mortgages, the desire of the average Chinese family to venture into the housing market again is lukewarm at best. This is demonstrated by the low sales figures and purchasing volumes in the real estate market, which accounts for close to 30 percent of GDP, since it ran into major trouble in 2021 and 2022 (SCMP, January 4; Global Times, November 15, 2022).

Moreover, despite the lifting of practically all COVID-19 prevention lockdowns and quarantines, relatively high joblessness and a lack of confidence in future economic growth are likely to reinforce consumer preferences for saving instead of spending. Aggregate household savings reached almost 20 trillion yuan in 2022, an increase of some 8 trillion yuan over 2021 (China News Service, January 30; Huanqiu, January 12). Three-years of “zero-tolerance” COVID strictures plus the sudden reversal of the policy on December 8 have also exposed dire problems concerning both state medical facilities and social welfare benefits particularly for the elderly. Last week, in Wuhan, more than 10,000 retired workers staged a demonstration against the government’s arbitrary reduction of medical payouts, which illustrates the financial troubles facing state pension and social welfare authorities (Rfi, February 10; RFA Chinese, February 8). The insufficient provision further predisposes the Chinese middle-class to prioritize saving for medical and retirement purposes over spending.

One Country, One Market  

The formation of a “high-standard market system,” particularly the building of a “unified national market,” is closely related to Xi’s goal of bolstering domestic consumption. As a key element in the “new development pattern,” the concept of a “unified national market” is also integral to promoting reliance on “internal circulation.” A united, homogenous market means a reduction of regional barriers to the circulation of resources and products as well as frequent crackdowns on violations of IPR as well as “monopolistic” or other unfair commercial practices (21st Century Economic Herald, February 10; Chinese Workers Net, February 7).

According to the Opinion on Expediting the Construction of a Unified National Market (hereafter Opinion), a policy statement issued by the State Council in March 2022, Beijing must “push ahead the high-efficiency circulation [of resources and products] and expansion of the scale of a domestic market” (Qstheory.cn, May 10, 2022; Gov.cn, March 25, 2022). The Opinion pointed out that while market forces should be allowed a greater role in promoting the efficiency of this unified national market, the government must do even more to raise the quality of “internal circulation” through means including supervising “fair competition” and “deepening the division of labor” among different production and service units. “We must expand the scale and volume of the market, [and] ceaselessly nurture and develop a strong domestic market,” the Opinion added.

During the Politburo Study Session, several newly named Politburo members, who are Xi protégés and have recently been promoted to lead key regions such as Beijing, Guangdong and Liaoning, also spoke of their strategies for expanding the GDP within their jurisdictions. What is lacking, however, are new policies to augment market forces and to demonstrate to multinationals and foreign governments that Xi is ready to reintroduce aspects of the Open-Door policies initiated by the great architect of Reform and Opening, Deng Xiaoping and followed by ex-presidents Jiang Zemin and Hu Jintao from the 1980s to the 2000s.

Moreover, recent government measures to encourage consumer spending, bail out overleveraged property developers and foster a fair and non-monopolistic “unified national market” could be signs that Xi is pivoting back to his obsession with exerting tight party-state control over the economy. The state could also, in the name of promoting fair and transparent competition, stage a renewed crackdown on quasi-private IT giants such as Alibaba, Tencent, and JD.com. Another manifestation of quasi-Maoist economic norms is the proliferation of Gongxiaoshe (???), government-run “supply and marketing co-ops,” which pose fierce competition to supermarkets, particularly those owned by private entrepreneurs. By the end of last year, there were 2,789 gongxiaoshe at the county level or above. These entities are estimated to have done about 6.26 trillion yuan (917 billion USD) worth of business in 2022 (New Beijing Post, November 15, Finance.sina.com, November 2). And despite reassurances made by the Xi team that Beijing would do more to strengthen China’s beleaguered private-sector enterprises, there has been a revival of yet another Maoist practice, which involves SOEs snapping up lucrative private firms via mergers and acquisitions (VOA Chinese, November 14, 2022; RFA Cantonese, November 2, 2022).

Conclusion

In the wake of more suspicious-looking flying vehicles appearing over North America, several of which have been shot down by the U.S. Air Force, Washington sanctioned six more Chinese firms alleged to have ties to the PRC’s military intelligence establishment last week (Global Times, February 12). Depending on what Xi might say in his forthcoming trip to Moscow—and how the PLA would respond to a planned visit to Taiwan by the new U.S. Speaker of the House Kevin McCarthy—U.S.-China relations seem to be heading towards an irreversible downward spiral. The fact that China-U.S. trade reached a record $690 billion in 2022 seems to indicate that a thorough decoupling of the two economies seems far-fetched (Cato Institute, February 9; Rfi, February 8). However, President Biden has been repeatedly criticized by Republican members of Congress for being too soft on China (SCMP, February 6). To be better placed for possibly one more run at the U.S. presidency, Biden may be predisposed to further beef up the “anti-China” containment policy that will have an adverse impact on Chinese consumption, manufacturing, as well as other aspects of the “internal circulation” policy.

By the Jamestown Foundation 

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Leave a comment
  • DoRight Deikins on February 24 2023 said:
    I am not an economist, so what is this new reliance on 'internal circulation' and the debt load of the infrastructure going to do to the Yuan, especially if Xi's 'smile diplomacy' and quasi-Maoist reforms do not win more foreign investment in China?

    One thing I do know is that China has taken central Party control to another level. Many of the autocratic and wanna-be autocratic governments must be salivating at the power and control the central govt of China has over its populace. Even Russia must be blushing at how much better China is doing with communism than they ever did, even under Stalin. But then China has a 3000 year history of central control, well before Chairman Mao introduced New Think to the Middle Kingdom.

    Unfortunately while there are always those who want to be controlled and enjoy the pseudo liberty that comes with it, I strongly believe that freedom is a desire that burns deep in the heart of all humans (unless maybe you are an ant).

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