Read the article below on China's Economy and answer the following:

1. Please, explore the current status of China's economy. What are its main challenges?

2. Please, explore the motto "no politics, no problem." Why and how has this changed in China?

3. Why does China's economic troubles may affect other countries ( including the U.S.)? What should the U.S. ( and others) do to prevent economic fall-out?

e End of China's Economic Miracle How Beijing's Struggles Could Be an Opportunity for Washington A DA M S. P O S EN Copyright 2023 by the Council on Foreign Relations, Inc. All rights reserved. To request permission to distribute or reprint this article, please visit ForeignAairs.com/Permissions. Source URL: https://www.foreignaairs.com/china/end-china- economic-miracle-beijing-washington

The End of China's Economic Miracle FOREIGN AFFAIRS 1 As 2022 came to an end, hopes were rising that China's economy and, consequently, the global economywas poised for a surge. After three years of stringent restrictions on movement, mandatory mass testing, and interminable lockdowns, the Chinese government had suddenly decided to abandon its "zero COVID" policy, which had suppressed demand, hampered manufacturing, roiled supply lines, and produced the most signicant slowdown that the country's economy had seen since pro-market reforms began in the late 1970s. In the weeks following the policy change, global prices of oil, copper, and other commodities rose on expectations that Chinese demand would surge. In March, then Chinese Premier Li Keqiang announced a target for real GDP growth of around ve percent, and many external analysts predicted it would go far higher. Initially, some parts of China's economy did indeed grow: pent-up demand for domestic tourism, hospitality, and retail services all made solid contributions to the recovery. Exports grew in the rst few months of

The End of China's Economic Miracle FOREIGN AFFAIRS 2 2023, and it appeared that even the beleaguered residential real estate market had bottomed out. But by the end of the second quarter, the latest GDP data told a very dierent story: overall growth was weak and seemingly set on a downward trend. Wary foreign investors and cash- strapped local governments in China chose not to pick up on the initial momentum. is reversal was more signicant than a typical overly optimistic forecast missing the mark. e seriousness of the problem is indicated by the decline of both China's durable goods consumption and private-sector investment rates to a fraction of their earlier levels, and by the country's surging household savings rate. ose trends reect people's long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritizing short-term liquidity over investment. at these indicators have not returned to pre-COVID, normal levelslet alone boomed after reopening as they did in the United States and elsewhereis a sign of deep problems. What has become clear is that the rst quarter of 2020, which saw the onset of COVID, was a point of no return for Chinese economic behavior, which began shifting in 2015, when the state extended its control: since then, household savings as a share of GDP have risen by an enormous 50 percent and are staying at that high level. Private-sector consumption of durable goods is down by around a third versus early 2015, continuing to decline since reopening rather than reecting pent-up demand. Private investment is even weaker, down by a historic two-thirds since the rst quarter of 2015, including a decrease of 25 percent since the pandemic started. And both these key forms of private-sector investment continue to trend still further downward. Financial markets, and probably even the Chinese government itself, have overlooked the severity of these weaknesses, which will likely drag down growth for several years. Call it a case of "economic long COVID." Like a patient suering from that chronic condition, China's body economic has not regained its vitality and remains sluggish even now that the acute phasethree years of exceedingly strict and costly zero-COVID

The End of China's Economic Miracle FOREIGN AFFAIRS 3 lockdown measureshas ended. e condition is systemic, and the only reliable curecredibly assuring ordinary Chinese people and companies that there are limits on the government's intrusion into economic life cannot be delivered. China's development of economic long COVID should be recognized for what it is: the result of President Xi Jinping's extreme response to the pandemic, which has spurred a dynamic that beset other authoritarian countries but that China previously avoided in the post-Mao Zedong era. Economic development in authoritarian regimes tends to follow a predictable pattern: a period of growth as the regime allows politically compliant businesses to thrive, fed by public largess. But once the regime has secured support, it begins to intervene in the economy in increasingly arbitrary ways. Eventually, in the face of uncertainty and fear, households and small businesses start to prefer cash savings to illiquid investment; as a result, growth persistently declines. Since Deng Xiaoping began the "reform and opening" of China's economy in the late 1970s, the leadership of the Chinese Communist

The End of China's Economic Miracle FOREIGN AFFAIRS 4 Party deliberately resisted the impulse to interfere in the private sector for far longer than most authoritarian regimes have. But under Xi, and especially since the pandemic began, the CCP has reverted toward the authoritarian mean. In China's case, the virus is not the main cause of the country's economic long COVID: the chief culprit is the general public's immune response to extreme intervention, which has produced a less dynamic economy. is downward cycle presents U.S. policymakers with an opportunity to reset the economic leg of Washington's China strategy and to adopt a more eective and less self-harming approach than those pursued by the Trump administration andso farthe Biden administration. NO POLITICS, NO PROBLEMS, NO MORE Before the pandemic, the vast majority of Chinese households and smaller private businesses relied on an implicit "no politics, no problem" bargain, in place since the early 1980s: the CCP ultimately controlled property rights, but as long as people stayed out of politics, the party would stay out of their economic life. is modus vivendi is found in many autocratic regimes that wish to keep their citizens satised and productive, and it worked beautifully for China over the past four decades. When Xi took oce in 2013, he embarked on an aggressive anticorruption campaign, which along the way, just happened to take out some of his main rivals, such as the former Politburo member Bo Xilai. e measures were popular with most citizens; after all, who would not approve of punishing corrupt ocials? And they did not violate the economic compact, because they targeted only some of the party's members, who in total make up less than seven percent of the population. A few years later, Xi went a step further by bringing the country's tech giants to heel. In November 2020, party leaders made an example of Jack Ma, a tech tycoon who had publicly criticized state regulators, by forcibly delaying the initial public oering of one of his companies, the Ant Group, and driving him out of public life. Western investors reacted with concern, but this time, too, most Chinese were either pleased or

The End of China's Economic Miracle FOREIGN AFFAIRS 5 Economic long COVID will likely plague the Chinese economy for years. indierent. How the state treated the property of a few oligarchs was of little relevance to their everyday economic lives. e government's response to the pandemic was another matter entirely. It made visible and tangible the CCP's arbitrary power over everyone's commercial activities, including those of the smallest players. With a few hours' warning, a neighborhood or entire city could be shut down indenitely, retail businesses closed with no recourse, residents trapped in housing blocks, their lives and livelihoods put on hold. All major economies went through some version of a lockdown early in the pandemic, but none experienced anything nearly as abrupt, severe, and unrelenting as China's anti-pandemic measures. Zero COVID was as unsparing as it was arbitrary in its local application, which appeared to follow only the whims of party ocials. e Chinese writer Murong Xuecun likened the experience to a mass imprisonment campaign. At times, shortages of groceries, prescription medicines, and critical medical care beset even wealthy and connected communities in Beijing and Shanghai. All the while, economic activity fell precipitously. At Foxconn, one of China's most important manufacturers of tech exports, workers and executives alike publicly complained that their company might be cut out of global supply chains. What remains today is widespread fear not seen since the days of Mao fear of losing one's property or livelihood, whether temporarily or forever, without warning and without appeal. is is the story told by some expatriates, and it is in keeping with the economic data. Zero COVID was a response to extraordinary circumstances, and many Chinese believe Xi's assertion that it saved more lives than the West's approach would have. Yet the memories of how relentlessly local ocials implemented the strategy remain fresh and undiluted. Some say the CCP's decision to abandon zero COVID in late 2022 following a wave of public protest indicated at least some basic, if belated, regard for popular opinion. e about-face was a "victory" for the protesters, in the words of e New York Times. Yet the same could not be

The End of China's Economic Miracle FOREIGN AFFAIRS 6 said for ordinary Chinese people, at least in their economic lives. A month before the sudden end of zero COVID, senior party ocials told the domestic public to expect a gradual rollback of pandemic restrictions; what followed a few weeks later was an abrupt and total reversal. e sudden U- turn only reinforced the sense among Chinese people that their jobs, businesses, and everyday routines remain at the mercy of the party and its whims. Of course, many other factors were at play in the immense, complex Chinese economy throughout this period. Business failures and delinquent loans resulted from a real estate bubble that burst in August 2021, and remain a persistent drag on growth and continue to limit local government funding. Fears of overregulation or worse among owners of technology companies also persist. U.S. trade and technology restrictions on China have done some damage, as have China's retaliatory responses. Well before the onset of COVID, Xi had started to boost the role of state-owned enterprises and had increased party oversight of the economy. But the party had also pursued some pro-growth policies, including bailouts, investment in the high-tech sector, and easy credit availability. e COVID response, however, made clear that the CCP was the ultimate decision-maker about people's ability to earn a living or access their assets and that it would make decisions in a seemingly arbitrary way as the party leadership's priorities shifted. SAME OLD STORY After defying temptation for decades, China's political economy under Xi has nally succumbed to a familiar pattern among autocratic regimes. ey tend to start out on a "no politics, no problem" compact that promises business as usual for those who keep their heads down. But by their second or, more commonly, third term in oce, rulers increasingly disregard commercial concerns and pursue interventionist policies whenever it suits their short-term goals. ey make examples of a few political rivals and large multinational businesses. Over time, the threat of state control in day-to-day commerce extends across wider and wider swaths of the population. Over varying periods, Hugo Chvez and

The End of China's Economic Miracle FOREIGN AFFAIRS 7 Nicols Maduro in Venezuela, Recep Tayyip Erdogan in Turkey, Viktor Orban in Hungary, and Vladimir Putin in Russia have all turned down this well-worn road. When an entrenched autocratic regime violates the "no politics, no problem" deal, the economic ramications are pervasive. Faced with uncertainty beyond their control, people try to self-insure. ey hold on to their cash; they invest and spend less than they used to, especially on illiquid assets such as automobiles, small business equipment and facilities, and real estate. eir heightened risk aversion and greater precautionary savings act as a drag on growth, rather like what happens in the aftermath of a nancial crisis. Meanwhile, the government's ability to steer the economy and protect it from macroeconomic shocks diminishes. Since people know that a given policy could be enforced arbitrarily, that it might be expanded one day and reversed the next, they become less responsive to stimulus plans and the like. is, too, is a familiar pattern. In Turkey, for instance, Erdogan has in recent years pressured the central bank into cutting interest rates, which he hoped would fuel an investment boom; what he fueled instead was soaring ination. In Hungary, a large scal and monetary stimulus package failed to soften the pandemic's economic impact, despite the success of similar measures in neighboring countries.

The End of China's Economic Miracle FOREIGN AFFAIRS 8 Outside the Shanghai Railway Station, Shanghai, December 2022 Aly Song / Reuters e same trend is already visible in China because Xi drove up the Chinese private sector's immune response to government intervention. Stimulus packages introduced since the end of the zero-COVID policy, meant to boost consumer spending on cars and other durable goods, have not gained much traction. And in the rst half of this year, the share of Chinese companies applying for bank loans remained about as weak as it was back in 2021that is, at half their pre-COVID averagedespite eorts by the central bank and nance ministry to encourage borrowing at low rates. Low appetite for illiquid investment and low responsiveness to supportive macroeconomic policies: that, in a nutshell, is economic long COVID. Once an autocratic regime has lost the condence of the average household and business, it is dicult to win back. A return to good economic performance alone is not enough, as it does not obviate the risk of future interruptions or expropriations. e autocrat's Achilles' heel is an inherent lack of credible self-restraint. To seriously commit to such

The End of China's Economic Miracle FOREIGN AFFAIRS 9 China today is gripped by widespread fear not seen since the days of Mao. restraint would be to admit to the potential for abuses of power. Such commitment problems are precisely why more democratic countries enact constitutions and why their legislatures exert oversight on budgets. Deliberately or not, the CCP has gone farther in the opposite direction. In March, China's parliament, the National People's Congress, amended its legislative procedures to make it easier, not harder, to pass emergency legislation. Such legislation now requires the approval of only the Congress's Standing Committee, which is made up of a minority of senior party loyalists. Many outside observers have overlooked the signicance of this change. But its practical eects on economic policy will not go unnoticed among households and businesses, who will be left still more exposed to the party's edicts. e upshot is that economic long COVID is more than a momentary drag on growth. It will likely plague the Chinese economy for years. More optimistic forecasts have not yet factored in this lasting change. To the extent that Western forecasters and international organizations have cast doubt on China's growth prospects for this year or the next, they have xated on easily observable problems such as chief executives' fears about the private high-tech sector and nancial fragility in the real estate market. ese sector-specic stories are important, but they matter far less to medium-term growth than the economic long COVID aicting consumers and small businesses at large, even if that syndrome is less visible to foreign investors and observers. (It may be apparent to some Chinese analysts, but they cannot point it out in public). And although targeted policies may reverse problems limited to a particular sector, the broader syndrome will persist. In recent months, Bank of America, the Economist Intelligence Unit, and Goldman Sachs, for example, have each adjusted downward their forecasts for Chinese GDP growth in 2023, shaving o at least 0.4 percentage points. But because the persistence of economic long COVID has not yet sunk in, and because many forecasts assume, erroneously, that Beijing's stimulus

The End of China's Economic Miracle FOREIGN AFFAIRS 10 programs will be eective, China watchers still overestimate prospects for growth in the next year and beyond. Forecasts of annual GDP growth in 2024 by the Organization for Economic Cooperation and Development (5.1 percent) and the International Monetary Fund (a more modest 4.5 percent) could be o by 0.5 percent or more. e need to correct downward will only grow over time. China's private sector will save more, invest less, and take fewer risks than it did before economic long COVID, let alone before Xi's second term. Durable goods consumption and private-sector investment will be less responsive to stimulus policies. e likely consequences will be a more volatile economy (because macroeconomic policy will be less eective in inducing households and smaller businesses to oset downturns) and more public debt (because it will take more scal stimulus to achieve the desired impact). ese, in turn, will drive down average economic growth over time by reducing productivity growth, in addition to reducing private investment in the near term. Yet Xi and other CCP leaders may simply take this as vindication of their belief that the country's economic future lies less with the private sector than with state-owned enterprises. Even before the pandemic, government pressure was leading banks and investment funds to favor state-owned enterprises in their lending, while investment in the private sector was in retreat. Research by the economist Nicholas Lardy has found that the share of annual investment going to China's private-sector rms peaked in 2015 and that the state-owned share has risen markedly since then, year-over-year. Economic long COVID will reinforce this trend, for two reasons. First, private investors and small businesses will err on the side of caution and remain liquid rather than make large loan-nanced bets. Second, any tax cuts or stimulus programs aimed at the private sector will deliver less immediate bang for the buck than investment in the state sector. Add to this Xi's ongoing push for self-suciency in advanced technology, which is subjecting a growing share of investment decisions to even more arbitrary party control, and the outlook for productivity growth and returns on capital only dims. OPEN-DOOR POLICY

The End of China's Economic Miracle FOREIGN AFFAIRS 11 U.S. and allied ocials, some of whom see strong Chinese growth as a threat, might take heart from the country's current ailment. But a slower- growing and less stable Chinese economy will also have downsides for the rest of the world, including the United States. If the Chinese keep saving rather than investing and continue to spend more on domestically delivered services than on tech and other durable goods that require imports, their overall trade surplus with the rest of the world will keep growingany Trump-style eorts to curtail it notwithstanding. And when another global recession hits, China's growth will not help revive demand abroad as it did last time. Western ocials should adjust their expectations downward, but they should not celebrate too much. Neither should they expect economic long COVID to weaken Xi's hold on power in the near future. As Erdogan, Putin, and even Maduro can attest, autocrats who break the "no politics, no problem" compact tend to remain in oce despite slowing, sometimes even cratering, growth. e perverse reality is that local party bosses and ocials can often extract yet more loyalty from a suering populace, at least for a while. In an unstable economic environment, the rewards of being on their good sideand the dangers of drawing their irego up, and safe alternatives to seeking state patronage or employment are fewer. Xi might take economic measures to paper over the cracks for some time, as Orban and Putin have done successfully, using EU funds and energy revenues, respectively. With targeted government spending and sector-specic measures, such as public-housing subsidies and public assurances that the government's crackdown on tech rms is over, Xi might still temporarily boost growth. But those dynamics will not last forever. As many observers have rightly pointed out, youth unemployment in China is troublingly high, especially among higher-educated workers. If CCP policies continue to diminish people's long-term economic opportunities and stability, discontent with the party will grow. Among those of means, some are already self- insuring. In the face of insecurity, they are moving savings abroad, oshoring business production and investment, and even emigrating to less uncertain markets. Over time, such exits will look more and more appealing to wider slices of Chinese society.

The End of China's Economic Miracle FOREIGN AFFAIRS 12 Washington should think in terms of suction, not sanctions. Even if outows of Chinese nancial assets remain limited for now, the long-term incentives are clear: for average Chinese savers, who hold most, perhaps even all, their life savings in yuan- denominated assets, buying assets abroad made sense even before the pandemic. It makes even more sense now that prospects for growth at home are diminishing, and the risks from CCP caprices are rising. e United States should welcome those savings, along with Chinese businesses, investors, students, and workers who leave in search of greener pastures. But current policies, enacted by both the Trump and the Biden administrations, do the opposite. ey seek to close o American universities and companies to Chinese students and workers. ey restrict inward foreign investment and capital inows, and they discourage Chinese companies from moving into the U.S. and allied economies, whether for production or for research and development. ey reduce downward pressure on the yuan and diminish, in the eyes of ordinary Chinese people, the contrast between their government's conduct and that of the United States. ese policies should be reversed. Easing these restrictions need not involve reducing trade barriers, however much this might benet U.S. economic and foreign policy on its own terms. In fact, if the American economy did a better job of attracting productive Chinese capital, labor, and innovation, those inows would partly make up for the substantial economic costs incurred as a result of the U.S. trade conict with China. Neither would Washington need to water down national security restrictions on critical technologies. To prevent illicit technology transfers by Chinese investors, the United States and its allies should, of course, restrict access to some specic sectors, just as they restrict certain sensitive exports. In truth, however, most Chinese intellectual property theft from U.S. companies takes the form of cybercrime, reverse engineering, and old-fashioned industrial espionage that is, for the most part, it needs to be addressed directly by means other than restricting inward foreign investment.

The End of China's Economic Miracle FOREIGN AFFAIRS 13 Removing most barriers to Chinese talent and capital would not undermine U.S. prosperity or national security. It would, however, make it harder for Beijing to maintain a growing economy that is simultaneously stable, self-reliant, and under tight party control. Compared with the United States' current economic strategy toward China, which is more confrontational, restrictive, and punitive, the new approach would lower the risk of a dangerous escalation between Washington and Beijing, and it would prove less divisive among U.S. allies and developing economies. is approach would require communicating that Chinese people, savings, technology, and brands are welcome in the United States; the opposite of containment eorts that overtly exclude them. Sweeping a street, Beijing, July 2023 omas Peter / Reuters Several other economies, including Australia, Canada, Mexico, Singapore, the United Kingdom, and Vietnam, are already beneting from inows of Chinese students, businesses, and capital. In so doing, they are improving their own economic strength and weakening the

The End of China's Economic Miracle FOREIGN AFFAIRS 14 CCP's hold at home. at eect would be maximized if the United States followed suit. If Washington goes its own way insteadperhaps because the next U.S. administration opts for continued confrontation or for greater economic isolationismit should at the very least allow other countries to provide o-ramps for Chinese people and commerce, rather than pressuring them to adopt the containment barriers that the United States is installing. When it comes to Chinese private commerce, the United States should think in terms of suction, not sanctions, especially as the CCP exercises rmer control of Chinese businesses. e more Beijing tries to stave o outows of useful factors of economic productionfor instance, by maintaining strict capital controls and limiting listings of companies in the United Statesthe more it will deepen the sense of insecurity driving those outows in the rst place. Other autocrats have tried this self-defeating strategy; many were forced to keep temporary capital controls in place indenitely, only to drive people and companies to make more eorts to get around them. As seen repeatedly in Latin America and elsewhere, including during the nal decline of the Soviet Union, such policies almost invariably spur more outows of people and capital. e Chinese economy's aiction with economic long COVID presents an opportunity for U.S. policymakers to change strategy. Instead of trying to contain China's growth at great cost to their own economy, American leaders can let Xi do their work for them and position their country as a better alternativeand as a welcoming destination for Chinese economic assets of all kinds. Even knowledgeable ocials tend to overlook how well this strategy served the United States in facing down systemic rivals in the twentieth century. It is often forgotten that it was far from evident during the Great Depression that the U.S. economy could outperform fascist regimes in Europe, and similar uncertainty about relative growth performance recurred throughout much of the Cold War. Despite that uncertainty, the United States emerged victorious in part because it maintained an open door for people and capital, siphoning o talent and investment and, ultimately, turning autocratic regimes' own economic

The End of China's Economic Miracle FOREIGN AFFAIRS 15 controls against them. As the CCP struggles with its self-aicted economic long COVID, that strategy is worth reviving today.