ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter

China's moment of truth

Trade war has exposed Xi to unprecedented criticism. Will he plow on or back off?

| China
Can President Xi Jinping prove his critics wrong?

It takes a trade war for China to face its moment of truth. Before the U.S.-China trade war escalated from a skirmish to a full-frontal clash, the conventional wisdom was that China's closed one-party regime was much better positioned to withstand the political fallout from a trade war than America's fissiparous democracy.

The Chinese Communist Party (CCP) did not have to worry about elections, it was said. By contrast, Donald Trump's Republican Party would likely suffer from a backlash from voters hurt by Chinese retaliations.

Unfortunately for President Xi Jinping, such wisdom seems wrong. Even though Chinese trade retaliations against the U.S. have concentrated pain on the heart of Trumpland, the American farm belt in particular, the adverse impact on Trump is muted at best. Except for the faint complaints of a few Republicans, Trump's party has largely stuck by him. Indeed, the unfolding U.S.-China trade war has barely registered on America's political radar screen ahead of the fall mid-term elections.

But the story in China is entirely different. Its leaders may not have to run for office, but they are still held accountable by both public opinion and the fierce rivalry within the regime. The trade war with the U.S., to almost everybody's surprise, has triggered a heated but healthy debate on Chinese foreign and domestic policies under Xi's leadership.

On the surface, much of the debate revolves around the wisdom of responding in kind to Trump's trade war. Many in China are rightfully concerned that their country would end up much worse off in a full-blown war than the U.S. But underneath such economic worries is a comprehensive critique of President Xi's foreign policy since he assumed power in late 2012. Instead of blaming Trump solely for initiating the trade war, Xi's critics, both in society and within the party, attribute the trade war to the collapse of the foundations of U.S.-China relations caused by his expansive foreign policy in the last five years.

Directionally, they point to Xi's abandonment of Deng Xiaoping's grand strategy of "keeping international low profile" and "shying away from leadership" as the source of China's current external woes. In particular, Xi's signature foreign policy initiatives, such as the $1 trillion Belt and Road Initiative (BRI), island-building in the South China Sea, and strategic partnership with Russia, are now seen as too costly, ambitious, risky and confrontational. In hindsight, a growing consensus among Chinese elites is that the totality of these policies has fundamentally altered how the West in general, and the U.S. in particular, perceives China's rise. If the U.S. had an agnostic view on whether a powerful China constitutes a threat to its global leadership and interests, that has now changed entirely. The shift in Chinese grand strategy under Xi has clarified Washington's strategic thinking about China -- and directly led to the end of its long-standing engagement policy toward Beijing.

The realization that the trade war merely presages a long-term Sino-American strategic conflict appears to have shocked Chinese political and economic elites. It has finally dawned on them that the "golden age" of Chinese development is over. If Sino-American relations continue to spiral downward, the "China dream" championed by Xi would turn into a geopolitical nightmare. Notably, critics of Xi refer to the famous question Deng asked four decades ago: Why have America's friends grown rich but its enemies have grown poor? The implication is devastatingly clear -- by making China an adversary of the U.S., Beijing's current foreign policy risks dooming its economic future.

Inevitably, such soul-searching about Chinese foreign policy has led to a full reexamination of Xi's domestic record. Here his critics have also found plenty to decry.

The overall sense is that China has regressed alarmingly since 2013. The domestic political strategy devised by Deng and continued by his immediate two successors, Jiang Zemin and Hu Jintao, has been replaced with an unusual combination of neo-Maoism and neo-Stalinism. Official ideological orthodox has been reinforced. The personality cult of the dominant leader, a lethal threat to the CCP and its elites that Deng and his colleagues tried hard to eradicate, has been revived by sycophants eager to curry favor with Xi, who has done little to discourage them. The failure to designate a successor to Xi at the 19th party congress last October and the abolition of presidential term limit at the National People's Congress (NPC) session last March only serve to confirm that Xi has set himself up for open-ended rule. In the meantime, Xi's selective anti-corruption campaign has shattered the personal security pact among the ruling elites and upended the delicate balance of power at the apex of the regime that was crucial to managing risks and avoiding catastrophic mistakes in China's one-party state.

The implicit social contract between the CCP and the Chinese people has also been shredded in the last five years. During most of the post-Mao era, the CCP has largely maintained a defensive posture to ensure its political monopoly. It reacted only to overt challenge to its authority and allowed ever-expanding public space and personal freedom. But this trend was reversed in 2013. Censorship, repression, and surveillance have intensified. Fear has been reintroduced into Chinese society.

Such criticisms of Xi's domestic policies might sound hollow if this giant political leap backward had been accompanied by significant and real progress in economic reform. A key rationale for concentrating power in the hands of a strongman is that this would make painful reforms possible. Sadly, this has not happened. Despite rolling out an ambitious blueprint of reform in late 2013, Xi's administration has recorded few achievements. Instead, there is backsliding on several fronts. According to IMF, China's nonfinancial sector debt to gross domestic product, a key measure of leverage, was 178% in 2012 but rose to an estimated 251% by 2017, evidence of the continuation of an unsustainable policy of credit-fueled economic growth. Instead of privatization, state-owned enterprises have been strengthened through mega-merges, protection of their monopoly profits, and other munificent privileges. Massive state subsidies have been planned to supercharge a state-directed industrial policy designed to supplant the West's technological dominance. Newly imposed controls have also halted China's movement toward capital account liberalization while crackdown on tycoons has raised worries about the security of private property under a regime unchecked by the rule of law.

The potency of this litany of criticisms cannot be underestimated. If nothing else, they sound the alarm that China is headed in a disastrously wrong direction.

But it would be premature to conclude that these criticisms have fatally weakened Xi's authority. His image as a strong, visionary and capable leader has certainly been damaged. Yet nobody should write his political obituary. His loyalists are in control of the most critical organs of the Chinese party-state -- the military, the anti-corruption agency, the propaganda department and the organization department. No plausible replacement is waiting in the wings to take over.

Based on historical experience, dictatorships have weak built-in capacities for self-correcting their mistakes, especially those made by their top leaders.

Today, Xi's challenge is to prove his critics -- and historical experience -- wrong. He can try to convince them that China's setbacks are temporary and his strategy will work and deliver huge long-term benefits. Alternatively, he can beat a quick but quiet strategic retreat and return to the cautious and moderate policies pursued by his predecessors.

Either way, this is a moment of truth, both for Xi and China.

Minxin Pei is a professor of government and a non-resident senior fellow of the German Marshall Fund of the United States.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more