The central drama in global politics is the rivalry between China and the United States— specifically, in whether and when Beijing will overtake Washington as the planet’s dominant political power. China, the world’s second-largest economy, recently tested a hypersonic missile, prompting fears in Washington that Beijing might be gaining a military edge. China has meanwhile enticed some 140 countries to join its Belt and Road Initiative (BRI) to boost economic development, and some observers ask whether the People’s Republic and its authoritarian allies are “winning.” But China also appears to face a growing profusion of problems. Evergrande, one of the country’s largest property developers, is near bankruptcy with around $300 billion in debt. GDP growth from the second quarter of 2021 to the third quarter slowed to 0.2 percent, well behind the 2-percent growth rate in the U.S. Major tech firms such as LinkedIn, Fortnite, and Yahoo are leaving the Chinese market, despite the potential customer base of some 1.2 billion people. Rising income inequality is eroding social mobility. China’s international position is faltering, as more than a dozen countries have abandoned the BRI, and negative views of China are growing in opinion polls globally. Australia, which had long cultivated amicable ties with Beijing, took a more antagonistic stance in September by signing a defense pact with the United States and United Kingdom that will sell U.S. nuclear-powered submarines to Canberra. What’s going on?

Victor Shih is the Ho Miu Lam Chair in China and Pacific Relations at the University of California, San Diego, and the author of Factions and Finance in China: Elite Conflict and Inflation. In Shih’s view, China’s economic and global strength peaked years ago. The root of China’s decline, he says, is the financial bubble that the country’s economy rests on. Many Chinese cities and companies, like Evergrande, can’t pay back their loans, so every year they pile on more debt to make their repayments. From Shih’s perspective, the country still has a leading position in some industries, and in arms production, but these successes mask the worsening problems underlying the economy. Social malaise is spreading throughout China, Shih says, as people feel that their hard work isn’t rewarded, and the country could be in for a major reckoning if the Communist Party starts to lose political control.

Michael Bluhm: Has China peaked?

Victor Shih: It’s a very good question. The peak was 2015. Xi Jinping launched the Belt and Road Initiative soon after taking power in 2013. There was a lot of action and lending in 2014 and 2015, but China lost $1 trillion from its foreign-exchange reserves throughout 2015 and 2016. After that, the Chinese government has become a lot more guarded about lending money to overseas projects.

The external influence and the optimism about China’s rising stature peaked in the 2015-16 period. After the election of Donald Trump, the U.S. began to impose trade and economic sanctions.

The Chinese Communist Party isn’t so worried about declining external influence. The Chinese government has learned that it needs to be more targeted in using financial leverage to gain diplomatic or political influence. The government is now focusing on economic influence overseas by being a major producer of vital parts in electronic products and heavy-industry machines.

The other focus is achieving military technological dominance—or at least parity—with the United States. By being the key producer of electronic and industrial goods, China can be indispensable; the world can’t afford to decouple with it. By achieving military dominance or parity with the United States, it can guarantee dominance, at least in the Asia-Pacific region.

Zhang Kaiyv

In certain ways, its influence and power continue to grow—with the recent missile testing alarming policymakers in the United States. Even though diplomatically or in external influence it may not be doing as well as before, in other crucial aspects, its power is still growing.

Bluhm:  The problems of the Chinese property-development giant Evergrande, once widely praised in China as a model company, have gotten worldwide coverage. Like a lot of other firms—and households—in China, Evergrande is mired in debts it can’t repay. What’s happening in the Chinese economy here?

Shih: A fundamental problem has been the tremendous misallocation of capital in the banking system. That has led to a very sizable problem with non-performing loans. If a company can’t repay a debt, the Chinese banking system will automatically roll over the debt. A new loan is issued to the debtor company, and then the new loan is used to repay the existing loan plus other activities. This rolling-over has happened on a massive scale among state-owned enterprises and vehicles to finance local governments, which are still borrowing money very aggressively, especially in the aftermath of Covid.

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