The gulf between China and us is most evident in economic priorities. Inflation remains a major problem in the west, so much so that the ECB has hiked rates again to fight it (the US Federal Reserve has paused but reports more loan hikes). Beijing is doing the exact opposite, lowering borrowing costs to revive disappointing economic growth. And there is constant talk of a return to the past, that is, public spending maneuvers to revive a troubled engine of Chinese development. Then there is the political divide. The US Secretary of State is traveling to Beijing this weekend, but the Chinese government is lowering its expectations for the visit. Xi Jinping unleashed increasingly bellicose language against the West, addressing the populace and urging them to prepare for hard times in anticipation of escalating tensions.
The economic scenario is dominated by data such as youth unemployment at 20%, a slowdown in exports and a less than expected post-Covid consumption recovery. Therefore, the central bank of the People’s Republic lowered interest rates in contrast to American and European monetary policy. As this risks not being enough, rumors of a return to the methods Beijing has used to support growth in the past, namely robust public spending maneuvers, are mounting. Xi had tried to avoid this therapy to avoid further widening the deficit and public debt, but now he appears to have concerns. A trillion yuan or renminbi (equivalent to $140 billion) public securities issue is forecast, which would refinance local authorities – the weak link in public finances – so they can reinvest in infrastructure. Other measures examined could remove certain restrictions on the purchase of second homes in order to bring a breath of fresh air to the real estate market, which has been in crisis for years.
International tensions are not helping the Chinese economy. Much talk in the West of “de-risking,” the latest neologism that suggests reducing “China risk” in multinationals’ investments, signals a trend toward downsizing ties. A small recent signal – purely anecdotal, but significant – is Microsoft’s decision to relocate the team of artificial intelligence researchers at its Microsoft Research Asia division from China to Canada. Security concerns and the hostile climate of the Chinese authorities have contributed to this shift, which impoverishes the human resources based on Chinese territory of a multinational company very advanced in artificial intelligence (Microsoft is the main financier of ChatGPT). Another recent sign of tension among many is the announcement that Canada is freezing its stake in the Asian Infrastructure Investment Bank, the institution established, among other things, to fund investment in the Belt and Road Initiative. Ottawa’s decision follows the resignation of a Canadian official who denounced the Chinese Communist Party’s continued interference in the bank’s business.
Antony Blinken’s visit to Beijing this weekend marks the umpteenth attempt to restore dialogue between the two superpowers, which was abruptly cut short by February’s spy balloon incident. However, the language used by the Chinese government to announce and prepare for this visit does not bode well. Xi Jinping continues to describe an aggressive America, and his diplomacy has demanded an apology from Washington for launching the spy balloon. Foreign Minister Qin Gang said in a phone call with Blinken to arrange the visit, “Since the beginning of this year, China-US relations have encountered new difficulties, for which it is perfectly clear who is responsible.”
Internally, Xi Jinping uses even harsher language. In a meeting with his senior national security staff, the President declared, “We must be prepared for the worst, most extreme scenarios. We must be prepared for the test of rough waters and dangerous storms.” On another occasion during a visit in Inner Mongolia he applied this formulation to the economic situation: “We must ensure the normal functioning of the economy in extreme circumstances.” If we want to be pessimistic, they sound like the tone of a leader preparing for war. The least alarmist interpretation might suggest that Xi wants America to be the scapegoat for China’s economic woes. But the adjective “extreme,” now systematically appearing in Xi’s official speeches and copied by his staff, risks alluding to an escalation of US economic sanctions triggered by disruptive events such as a conflict over Taiwan.
Among the signals that will be crucial this weekend, will Xi decide to receive Blinken in person, or will he “downgrade” the US Secretary of State’s visit by only letting him meet with his peers, i.e. the Secretary of State?