Since the outbreak of Covid, China’s economy has been straining. Recently, Beijing announced stagnant GPD growth for the second quarter of the year—up just 0.8 percent from the first quarter, while exports declined by 12 percent and domestic retail and property sales remained low. Youth unemployment is hovering around 20 percent.

After the country fully reopened in late 2022—following nearly three years of hard pandemic lockdowns—it hasn’t been able to get its economy moving again. China’s main global rival, the United States, saw GDP growth of 2.4 percent in the second quarter, as U.S. inflation continued to fall—defying many economists’ forecasts of recession. The pattern is historically unusual for the People’s Republic. For decades, the Chinese economy has been expanding vigorously, with annual GDP growth regularly hitting government targets of 7 and 8 percent. What’s going on now?

Victor Shih is the Ho Miu Lam Chair in China and Pacific Relations at the University of California, San Diego, and the author of Coalitions of the Weak: Elite Politics in China From Mao’s Stratagem to the Rise of Xi. To Shih, under the lingering effects of Covid, deeper and more intractable problems have been building in the Chinese economy for years, and they’ve come to a point now where they’re preventing Beijing from using its traditional policy repertoire to drive growth.

In the meantime, these economic problems are stoking fears about the future among the Chinese people—and forcing the Chinese Communist Party’s leadership to do what it can to improve ties with the U.S. and other Western countries. But for Shih, it’s still uncertain whether a new, low-growth China will ease other countries’ security concerns about it, as Beijing continues with its financial support for export firms in critical industries and its steadily increased military spending.

Michael Bluhm: What do you see behind the slowdown?

Victor Shih: There are short-term causes and, I think, long-term causes.

In the short term, the country is still suffering in the aftermath of the Covid lockdown, which had a massive impact on the economy. In the U.S., the federal government gave enormous aid to businesses, big and small. But in China, the central government only helped the manufacturing sector; it didn’t help the service sector at all. So a lot of Chinese service firms ended up shuttering during the pandemic—and ultimately couldn’t come back.

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