If there is a secret plan in Xi Jinping’s desk to brainwash the 170 million Americans on TikTok into accepting their country’s decline gracefully, then it’s in a bottom drawer. The real problem for America and the world is what’s in the top drawer: misguided plans for Chinese growth that seem destined to aggravate trade tensions and tempt Communist Party leaders into foreign adventures. First, a word on TikTok. Last week’s huffing and puffing over a wildly popular social media app seems about as overhyped a political moment as Washington has manufactured in a long time. American leaders are not wrong to worry about the consequence of a foreign owner of what is today a powerful information channel: they would surely do the same if TikTok’s owner ByteDance made a bid for Fox News or the New York Times. But let’s be clear that TikTok will remain almost as addictive to teenagers in the hands of former Treasury Secretary Steven Mnuchin or whichever bidder might prevail in a forced sale of the platform. And regardless of the ultimate financial owner, China’s cyber services will still be working hard on tools to manipulate it and every other popular social media feed if it serves their purpose. But none of this begins to address the central risk from China over the next decade: its slowing growth. A marginally weaker rival might normally seem welcome, but the way China is slowing and the consequences for the global economy seem sure to make current the antagonism worse. Xi and his colleagues appear to have fundamentally misdiagnosed their current challenges. At the recent National People’s Congress, Prime Minister Li Qiang announced an ambitious growth target of “about 5%” for this year, apparently on the back of more government spending and easier credit. There are, in fact, early signs that retail spending and industrial output may be stabilizing. But the country’s real estate collapse continues to leave consumer confidence badly wounded. Prominent growth forecasts are closer to 4.6% for 2024 and demographic headwinds mean these numbers will surely edge lower over time. Even as the economy wobbles on the edge of deflation, China’s government has been careful to avoid a spending “bazooka” that would set off a fresh wave of property speculation while adding more debt to its balance sheet. But consumer demand will not fully recover without confidence that home prices have bottomed. Nor will robust growth return amid so much business uncertainty about tightening of political control. The global consequences of slower growth are clear. Lower prices may help cool global inflationary pressures slightly, but China will continue to rely excessively on manufactured exports for growth driving current trade tensions even higher. For all the talk of China’s need to rebalance its economy, its manufacturing exports continue to run an expanding surplus as a share of global GDP. The offsetting deficit appears largely in the United States, which careful observers will recall is deep into an angry election campaign. In rare alignment, both candidates accuse China of abusing fair trade rules and undermining U.S. job growth. Resentments are also rising in Europe, where Brussels has launched an investigation into Chinese subsidies for its electric vehicle exports. China’s economic challenges and America’s distractions abroad may have encouraged a lull in acrimonious exchanges between Washington and Beijing following Xi’s meeting with President Joe Biden last November. But it’s wishful thinking to believe the truce is indefinite. In the United States, there are too many forces that are angry at China’s rise. Western policymakers need to do a better job setting priorities for a bilateral economic relationship in which they have limited influence. In China, the Communist Party’s failure to deliver sustainable prosperity may threaten its political legitimacy and make confrontation abroad look irresistible. Everyone is bracing for a possible Taiwanese step toward independence or a naval confrontation in the South China Sea, but the trigger could be as random as another weather balloon over Guam or the detention of another business executive. For investors the welcome prospect of inflation moderating slightly from lower Chinese prices looks easily overwhelmed by rising acrimony that will bring more tariffs, sanctions and export controls. Meanwhile, the cost of running a global business looks sure to become still more expensive as firms reinforce back-up supply chains, accumulate even larger inventories and carry more balance sheet cash - just in case. Meanwhile, Western policymakers need to do a better job setting priorities for a bilateral economic relationship in which they have limited influence. To the extent that they want to persuade China that rising manufacturing exports undermine Beijing’s own growth goals, distractions like social media ownership do little to advance the conversation. |