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Economic, Not Military Tools Will Rein in China

Posted on Thursday, June 22, 2023
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by Ben Solis
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AMAC Exclusive – By Ben Solis

China

In the ongoing great power competition between the United States and China, it is quickly becoming clear that Washington’s economic leverage, not military might, could be the deciding factor.

At the start of the Russia-Ukraine war, many Western analysts predicted that Beijing would be watching closely to see how American-made arms fared against the Russian war machine. But despite Ukrainian successes, China has refused to back down from its increasingly aggressive stance in the South China Sea.

Earlier this month, Chinese Defense Minister Li Shangfu confirmed that China would “not renounce” the use of force against Taiwan. Shangfu made no attempt to conceal his aggression, saying that China “would not hesitate” to launch a full-scale war if Taiwan “insisted on independence and resisted” unification.

A day after those comments, a Chinese warship nearly rammed a U.S. destroyer in the Taiwan Strait during a joint U.S.-Canadian mission.

The Biden administration has largely backed down in the face of Chinese military aggression, a move that many Republicans in the United States have criticized as weak. On Monday, Secretary of State Antony Blinken told reporters the U.S. “does not support Taiwan independence” following a meeting with Chinese President Xi Jinping. Rep. Ben Cline (R-VA) called that statement a “dangerous display of weakness towards our adversaries on the world stage,” while Sen. Marsha Blackburn (R-TN) accused Blinken of “appeasing Xi Jinping.”

What the Biden administration fails to realize is that China’s military posturing is in large part a distraction from very serious economic concerns. After decades of what appeared from the outside like unprecedented economic growth, the Chinese economy is showing major cracks that Western nations and the U.S. in particular can exploit.

China’s economy has long relied on accessing Western lines of capital, including U.S. pension funds and the American capital market. Without access to these funds, Xi Jinping’s economy of waste and failure cannot be financed.

Last year, China’s national debt was 295 percent of the country’s GDP – a figure that was well over double the United States’ own alarming debt-to-GDP ratio of 129 percent.

Goldman Sachs estimates that China’s total debt is around $23 trillion, much of which comes from municipalities that are now facing the prospect of deep spending cuts in order to finance their debt. The Straits Times, a Singapore-based newspaper, reported last month that major Chinese cities like Wuhan and Guangzhou have proposed cuts to what meager public health services exist, prompting rare street protests. Many civil servants have had their pay slashed, and other government workers have had their paychecks delayed for up to two months.

As a result, the Chinese yuan hit a six-month low vs. the U.S. Dollar earlier this month. China’s manufacturing sector is continuing to struggle, and growth in the services and construction sectors is also easing.

While some Western economists have been quick to blame China’s economic woes on lingering effects from the pandemic, the reality is that China is suffering from much deeper problems inherent in the government’s communist ideology.

As with all communist countries, China is a tangled net of more-or-less atomized bureaucracies all fueled by corruption. Local governments and state-controlled firms use special privileges and personal favors to skirt rules and regulations while enriching a few government elites.

This dynamic guarantees gigantic waste and unchecked debt. Moreover, it becomes impossible to know the actual state of the economy, as each successive level of bureaucrats lies to their superiors about output and productivity in order to avoid punishment for not meeting expectations.

As a result, the official numbers released by the Chinese Communist Party on the state of the Chinese economy are largely useless.

Such a situation leads to a radical dissonance between theory and reality in China, as even Xi Jinping learned the hard way earlier this year with his gargantuan “Xiogan New Area,” a massive development project which Chinese commentators excitedly compared to the Great Wall upon its launch in 2017.

But more than five years on, most of the buildings in the project sit empty, despite billions in government investment. Construction has slowed to a standstill, and dirt roads still run beside many gleaming steel and glass structures.

Amid theses structural flaws in the Chinese economy, and with a leader more committed to personal ego and Marxist ideology than growth, Western credit and investment are vital lifelines for the CCP. For instance, U.S. investors made 67 deals with Chinese firms involved in semiconductor manufacturing in 2020 that by 2022 had provided nearly $9 billion to the Chinese economy, mostly from U.S.-based public and private investment funds.

Former President Donald Trump recognized this, which is why he used a system of tariffs and sanctions to place pressure on Chinese officials. As Roger Robinson, a former Reagan administration official who helped create the 1980s-era plan of economic warfare against the USSR, told U.S. lawmakers in testimony before Congress last month, China has to finance its financial obligations with capital regularly acquired from U.S. financial markets. Therefore, capital sanctions are “Beijing’s single greatest non-military fear,” he said.

Despite holding this leverage, the Biden administration has been hesitant to use it. Rather than pressing forward with a “de-coupling” from China, Biden has been careful to state that he only wants a “de-risking” and “diversified” U.S.-China relationship.

The United States may now be in another unique moment of history, much as it was before the fall of the Soviet Union, with the power to bankrupt its chief global rival. The only question now seems to be if the country has a leader smart enough to recognize this advantage and bold enough to act on it.

Ben Solis is the pen name of an international affairs journalist, historian, and researcher.

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