CHICAGO – The 2022 Winter Olympics, set for February 4-20, have been riddled with controversy ever since they were announced in 2015. Many expect the Chinese government to use its role as host to solidify its political power both domestically and internationally. The US-led diplomatic boycott of the Games to protest China’s alleged human-rights violations against Uyghurs in Xinjiang has frustrated both the Chinese authorities and human-rights activists.

The controversy is not baseless, but they reflect myopic perspectives. A sober assessment suggests that the Winter Games also are likely to have some important long-run benefits for both China and the wider world.

All host countries seek to bolster their national prestige through the Games, but this is probably not China’s primary motivation for staging them. After all, China will be hard pressed to beat out the traditional major contenders in winter sports from North America and northern Europe. In the previous Winter Games, Norway, Germany, Canada, the United States, and the Netherlands each won 20 or more medals. China won just nine in total, and only one gold (in men’s speed skating).

By contrast, China often is a top medal winner at the Summer Games. In the 2004 Athens Olympics, it had the third-highest total and the second-highest gold medal count, leading to hopes that, with enough investment, it could come out on top in the 2008 Beijing Summer Games. In the event, China took home the most gold medals and trailed the US by just two in the total medal count.

But no amount of money could transform the country from a Winter Olympics straggler into a global winter-sports power in just five years. Although large parts of the Chinese population live in very cold climates, the history of poverty in modern China meant that the country lacked not only the infrastructure but also the culture for winter sports like downhill skiing.

For China, hosting the Winter Games is about much more than prestige in athletics. The government has approached the event as an opportunity to build an entire winter-sports industry from scratch. In addition to budgeting $3.9 billion for Olympic infrastructure and facilities – a miniscule amount compared to the $43 billion budgeted for the 2008 Summer Olympics – China has fostered economy-wide investment in winter sports. In 2016, the government’s Five-Year National Fitness Program committed $237 billion to reinvigorating the sports industry, with a focus on winter events. Some 400 ski resorts were built across the country between 2014 and 2017, with a goal of 800 by this year.

Consumer demand for winter sports, together with investment spurred by the Games, have provided jobs and created a burgeoning tourism industry in many rural locations. All large public expenditures can boost employment. But unlike the Summer Games or other major infrastructure projects, which tend to be based in major metropolitan areas, the Winter Olympics and the nationwide winter-sports push required significant construction in less economically developed areas.

Previously impoverished mountain areas are now home to ski lifts, hotels, and restaurants, all connected to larger urban hubs with new rail lines and highways. The Winter Games thus have become an instrument for reducing urban-rural inequality – one of China’s most urgent economic problems.

China’s new enthusiasm for winter sports also provides a unique opportunity to build affinity and respect between the Chinese people and the West. In a period of heated political rhetoric and mutual suspicion, athletics and sports culture offer avenues for rapprochement. After all, nowhere is Western culture more popular in China than in basketball and soccer arenas, where fans marvel at the sheer athletic ability of top players.

In addition to hundreds of millions of Chinese viewers with a new interest in traditionally Western winter sports, there also will be a new generation of Chinese superstar athletes who have been training with coaches and specialists from countries like the United Kingdom and Canada. The trust and affinity established by these personal interactions likely will have a wider positive influence on understanding and trust between people in China and the West.

That brings us to the recently announced boycott, which applies only to Western diplomats and officials, not athletes. The move has been criticized as insufficient by human-rights activists, and as too harsh by ordinary Chinese, many of whom are baffled and offended by it. Moreover, the fact that some Western powers have not signed on to the boycott may weaken America’s future bargaining position.

But these concerns overlook the policy’s potential usefulness. A diplomatic boycott of the Beijing Games could be just the political innovation needed right now. Given the lack of transparency over the Uyghur situation, the US government is in a delicate position. It is called upon to act by many constituents – and its own political ideology – but lacks the necessary information to do so. As the US learned all too painfully after the war in Iraq, acting on imperfect information can have long-lasting negative consequences.

The diplomatic boycott thus offers a middle way. Unlike the Cold War-era US boycott of the Moscow Summer Games in 1980 and the Soviet boycott of the Los Angeles Summer Games in 1984, all athletes will be able to compete. The soft-power influence of the Olympics will not be undermined completely. The Chinese can voice their unhappiness without resorting to stronger measures that would result from an attempt to derail the Games entirely. Most importantly, a diplomatic boycott maintains the distinction between politics and sports – politicians and citizens – at a time when de-politicization is exactly what the world needs.

LONDON – The year 2021 marked the start of a new paradigm for the Chinese economy. China is shifting from a model championing GDP growth above all to one emphasizing efficiency, consumer welfare and protection, climate-change mitigation, and environmental protection. Chinese companies’ growth will be less unbridled and more regulated and monitored. The goal of building a global manufacturing powerhouse has evolved into the pursuit of techno-nationalism. China’s leaders believe their country is on the verge of a transformation into a truly “modern socialist economy.”

China is not alone. Regardless of what epithet they apply to their respective political systems, and despite bilateral tensions, China and the West are facing some similar challenges. Both are confronting increasing income disparities, the boundless growth of Big Tech firms, and a deepening divide between elites and the grassroots. But unlike the rest of the world, China has decided to tackle these issues head on.

Over the course of 2021, the Chinese government took 20-30 major steps to regulate and discipline an array of leading corporations, ranging from consumer-facing platform companies to education firms. The grounds for these interventions were antitrust, data security, and social equality – and sometimes all three at once.

Even as these sweeping moves generated much overwrought commentary in the international press, they merely scratched the surface of the deeper transformation that is underway. Regulatory and enforcement actions are both necessary and welcome in a country where companies’ growth prospects and contributions to GDP have long overridden consumer welfare and protection.

The changes introduced in 2021 represent a “coming of age” for the Chinese economy, signaling that people matter more than aggregate numbers. Under the new rubric of “common prosperity,” the government’s official goal for the coming decade is to create the conditions for the growth of a large, prosperous middle class, better opportunities for everyone, and more “empathetic” behavior on the part of Chinese companies. The unrestrained Western-style capitalism that has resulted in a “middle-class squeeze” is to be avoided in favor of a more “olive shaped” income structure.

The Turning Point

Forty years ago, Deng Xiaoping lifted the ideological taboo on individual profit-seeking to allow some people to get rich first, and then let the rising tide lift all boats. Today’s Chinese leadership believes that it is time to let the tide come in. COVID-19 has laid bare the inequality between haves and have-nots. Big Tech companies have grown even bigger and more powerful during the pandemic. With everyone homebound and cozily stuck together – elites along with masses – attention has turned to domestic issues and the need for national self-reliance and independence.

Contrary to conventional wisdom in the West, China’s push for greater regulatory oversight is not motivated by a desire simply to crack down indiscriminately on the private sector, to cut billionaires down to size, or to limit Chinese companies’ international access. There were 407 public listings for Chinese companies in 2021, and over 83% of them were private corporations, not state-owned enterprises.

Common prosperity is linked to the broader goal of social harmony. One of the greatest ironies in contemporary Chinese society is the hyper-competition in education, which has left parents anxious and children miserable. Families are spending inordinate amounts of time and money on extracurriculars, filling kids’ schedules with things they don’t necessarily need for the modern economy. The phenomenon has been likened to a crowded theater in which a few people decide to stand up to get a better view, forcing everyone else to do the same. In the end, no one is better off.

Now that most Chinese have fully embraced the digital life, there is also growing concern about the misuse of personal data. In a few high-profile cases, such abuses have cost people not only their personal wealth but their lives. Moreover, the Chinese tech giants have shown scant concern for employees’ welfare, leading to a loss of motivation among overworked young people who had hoped to build a family and are now “lying flat” (no longer going above and beyond at their jobs).

China’s authorities have recognized the social tensions and vulnerabilities that come with unchecked market-driven growth. While the market failures and inequities of the new digital age are not unique to China, the Chinese approach to tackling these problems is characteristically different from that of most other countries. For starters, the responses are often swifter and more dramatic. By contrast, US policymakers have done almost nothing to rein in Facebook, for example, despite serial revelations of the company’s questionable practices and frequent reminders of the deep societal problems its business model has caused.

A second difference is that China is unlikely to adopt the kind of large welfare state that one finds in some European countries. The country prizes hard work as a national and traditional virtue. And, unlike in the United States, the top 1% are not castigated, even if some individual shaming (or worse, where law-breaking is involved) occasionally plays a role. Chinese leaders want to eliminate only the “unfair” sources of inequality, such as entry barriers, excessive monopoly powers, and legal loopholes that enable “illegitimate income.”

A convenient critique is that China’s efforts to regulate companies and limit their growth ambitions will kill the incentive to innovate. But this argument ignores the fact that Chinese entrepreneurship is driven by more than monetary reward. To become “important” through a committed career or a major contribution to society is a way to “glorify one’s ancestors,” as the Confucian saying goes. Driven by a larger purpose, Chinese entrepreneurs adapt agilely to changing circumstances as they tenaciously pursue their goals.

Moreover, for every unhappy billionaire who needs to be “persuaded” to contribute more philanthropically, there are many more happy millionaires who genuinely welcome new regulations on big firms’ size and scope, as these will improve their own chances of becoming billionaires.

Risks and Rewards

China’s road ahead is fraught with challenges. No country of similar size has fostered a political economy that is both equitable and capable of fully harnessing dynamic innovation and efficiency. There are risks associated not only with de-globalization but also with a continuation of globalization that excludes China. Another big risk, according to some outsiders, is that policies designed to transform the investment climate and business environment will make matters worse or amount to overkill. And an even more consequential risk is that ideology will take precedence over prudent economic management, reversing the mental unshackling that enabled the shift toward a full-fledged market economy over the last 40 years. But this is unlikely to happen.

Fortunately, the past year also brought many market-friendly developments, from BlackRock launching its first China fund to Hong Kong’s stock exchange being cleared to offer A-share futures. Foreign players are gearing up to expand the scope of foreign-funded institutional investments in China, proving that greater economic liberalization can coexist with stricter regulatory oversight. Moreover, since the phase-one trade deal with the US, China has approved 28 financial licenses and 100% of all tariff exemptions requested by US companies. Despite Sino-American tensions and pandemic-related disruptions, trade and financial flows have held up.

China has also strengthened its climate commitments and announced that it will halt external financing of coal-fired power generation. With growing awareness of the issue among corporates and households, the People’s Bank of China, local governments, and financial institutions have pledged to support smaller companies, and regulators have published a green-bond taxonomy as part of a broader effort to integrate climate issues into macroprudential management. Climate diplomacy remains an important channel through which China can strengthen its ties with the rest of the world and demonstrate global leadership. That means both working with advanced economies and helping other developing countries achieve their targets for net-zero emissions.

Like many other countries, China will have to be mindful of various near-term cyclical issues in the coming year, including the slow recovery from the pandemic, increasing indebtedness and default risk, more frequent natural disasters, and subdued investment and consumption. But beneath the natural ebb and flow of market economies, the country will be moving toward greater equanimity, tolerating lower growth rates with emphasis on quality, and greater cyclical volatility. Most Chinese will regard the sacrifices made to achieve “common prosperity” as both necessary and wise.

SHANGHAI – In just four decades, China’s economy has achieved an unprecedented level of wealth and development, and, until recently, its upward trajectory of economic growth and prosperity seemed set to continue. But as political pressures and the coronavirus push many countries – particularly the United States – to embrace more nationalist policies, the heyday of globalization soon could be replaced by a post-pandemic era shaped by national-security concerns and border controls.

This is not good news for China, which would prefer that the world maintain the economic openness it achieved in recent decades. For that reason, China had been working hard to align its economic and trade activities with international rules and norms. But now it seems that China must prepare for a future characterized by higher trade barriers and restrictions.

To this end, China’s 14th Five-Year Plan makes clear that the country will seek to reduce its dependence on external demand. The “dual-circulation strategy” announced in the plan instead emphasizes reliance on the country’s huge population. China also plans to invest heavily in cutting-edge sectors, such as artificial intelligence and semiconductors, and work to achieve self-sufficiency in core technologies.

Outsiders are deeply suspicious of China’s moves to increase state control over its economic development, such as imposing new regulations on tech companies and capital markets. They fear that the country is prioritizing its geopolitical objectives over the quest to build a market economy. Some even worry that China will return to the development model that predominated before Deng Xiaoping launched the country’s “reform and opening up.”

These fears are overblown. China is unlikely to return to a state-controlled economy or enact isolationist policies. Instead, the increased role of the state in the economy and a shift toward self-reliance should be interpreted as a response to a changing – and, at times, hostile – external environment.

This shift likely would have happened even if Sino-American relations had not deteriorated as they have, owing to China’s enormous population. Recognizing the potential of its own massive internal market, China’s leaders have long sought to increase domestic demand as a hedge against external changes. As for technological progress, a larger population implies more talent and higher returns for innovation.

But, amid the retreat from globalization, China’s advantage may be even greater. In a 2018 paper, Klaus Desmet, Dávid Krisztián Nagy, and Esteban Rossi-Hansberg showed that in a world of restricted cross-country trade and migration, countries with large populations can provide more opportunities to increase economic output through internal trade and specialization.

The most populous countries are not necessarily the richest today, the authors note, largely because of migration. But if barriers to migration grow high enough, populous countries will outpace smaller countries in innovation, even if the latter are richer. Because long-run growth is driven by improvements in technology, this translates into a major economic advantage for countries with larger populations. This outcome highlights just how self-defeating America’s turn inward is: it’s clear that America’s success is thanks to migration and globalization.

To be sure, China is facing strong demographic headwinds: its birth rate dropped to a record low in 2020. But the effects of this decline will take a few decades to have an impact. China’s demographics today give the country a significant advantage over the US in terms of human capital for at least the next 20 years. Projections of China’s future growth suggest that if China makes the most of this advantage – as it seems poised to do – the US will find it all but impossible to hamper China’s economic progress. Rather than thwarting China’s ambitions, America’s policies will encourage China to continue hedging its bets, including by rethinking its national-security strategy and shifting more resources to its science and technology sectors. In the worst decoupling scenario, the world’s two largest economies will end up dominating their own technology-supply systems, each with its own rules and standards.

This is a distinct possibility. But visionary politicians should appreciate how much more could be achieved on both sides if the countries instead worked together. The US would be far better served by seizing the opportunities China’s rise creates. And, while China’s large population affords it a major advantage in a deglobalized world, it still has a lot to learn from more advanced economies, beginning with the US. China remains a developing economy, after all, with a per-capita GDP amounting to just one-quarter of the OECD average.

More broadly, while a more populous country has a large domestic market to fall back on, that is no substitute for access to the global market. Likewise, ties to the outside world, including the sharing of knowledge and ideas, invariably accelerate technological progress. And an open and decentralized economic system that encourages market-led activity is far more conducive to the iterative process vital to the commercialization of innovation.

It’s clear that China has much to gain from a more open global economic system. China’s leaders have emphasized that they are not abandoning the path of market-led development and returning to a closed economic model – and there is no reason to believe otherwise.

STANFORD – The year 2022 will be a critical one in the history of the world. In a few days, China – the world’s most powerful authoritarian state – will begin hosting the Winter Olympics, and, like Germany in 1936, it will attempt to use the spectacle to score a propaganda victory for its system of strict controls.

We are at, or close to, important decisions that will determine the direction in which the world is going. A new German government was formed late last year, and the French presidential election is set for April. In the same month, Hungary’s voters may – against great odds – turn their authoritarian ruler out of power. Together with Russian President Vladimir Putin’s decision on whether to invade Ukraine, these developments will help determine the fate of Europe.

In October, moreover, China’s 20th Party Congress will decide whether to give President Xi Jinping a third term as General Secretary. Then, the United States will hold a crucial mid-term election in November.

Climate change will remain a paramount policy challenge for the world, but the dominant geopolitical feature of today’s world is the escalating conflict between systems of governance that are diametrically opposed to each other. Let me define the difference as simply as I can.

In an open society, the role of the state is to protect the freedom of the individual. In a closed society, the role of the individual is to serve the rulers of the state. As the founder of the Open Society Foundations, obviously I am on the side of open societies. But in a world teetering on the edge of military aggression, both in Ukraine and in Taiwan, the victory of open societies cannot be taken for granted. So, the most urgent question now is: Which system will prevail?

Open or Shut

Each system has strengths and weaknesses. Open societies unleash the creative and innovative energies of people, while closed societies concentrate power in the hands of a one-party state. Those are the strengths. The weaknesses are more specific to local and regional conditions. For example, the relationship between the European Union and its member states is still evolving. The EU ought to protect Lithuania, which recognized Taiwan, from an unofficial blockade by China, but will it?

US President Joe Biden has generally adopted the right policies. He told Putin that Russia will pay a heavy price if it invades Ukraine, but the US will not go to war to defend Ukraine. If Putin attacks, the heaviest penalty he will face will be greater transatlantic cooperation. The Biden administration won’t offer any unilateral concessions but seeks a peaceful solution. The choice now is up to Putin.

At the same time, Biden has made it clear to Xi that if he uses force against Taiwan, China will have to confront not only the US but also a larger alliance, composed of Australia and the United Kingdom (which last year formed the AUKUS grouping with the US) and Japan and India (which together with Australia and the US comprise the so-called Quad), with a number of other potential allies that are not yet fully committed to joint action, such as South Korea and the Philippines. Japan is the country that has most fully committed to defending Taiwan.

Xi, however, has declared that he is determined to assert China’s sovereignty over Taiwan by force if necessary. He is devoting enormous resources to armaments. Recently, China surprised the world by demonstrating a nuclear-capable hypersonic controllable missile.

The US has nothing comparable and doesn’t intend to compete. I think that is the right policy, because China’s hypersonic achievement does not change the dynamic of mutual assured destruction that will stop the enemies from attacking each other. The missile is merely a propaganda victory. Still, war between the US and its enemies has become more plausible, and that is not a pleasant subject to contemplate.

A Brief History of the Present

Recently, I have asked myself, how did the current situation arise? When I embarked on what I call my political philanthropy in the 1980s, American superiority was not in question. Why is that no longer the case?

Part of the answer is to be found in technological progress, most of which is based on artificial intelligence, which was in its infancy in the 1980s. The development of AI and the rise of social media and tech platforms evolved together. This has produced very profitable companies that have become so powerful that no one can compete against them, though they can compete against each other. These companies have come to dominate the global economy. They are multinational, and their reach extends to every corner of the world. We can all name them: Facebook, Google, Apple, Microsoft, and Amazon. There are similar conglomerates in China, but their names are less familiar in the West.

This development has had far-reaching political consequences. It has sharpened the conflict between China and the US and has given it an entirely new dimension.

China has turned its tech platforms into national champions; the US is more hesitant to do so, because it worries about their effect on the freedom of the individual. These different attitudes shed new light on the conflict between the two systems of governance that the US and China represent.

In theory, AI is morally and ethically neutral; it can be used for good or bad. But in practice, its effect is asymmetric.

AI is particularly good at producing instruments that help repressive regimes and endanger open societies. Interestingly, the coronavirus reinforced the advantage repressive regimes enjoy by legitimizing the use of personal data for purposes of public control.

With these advantages, one might think that Xi, who collects personal data for the surveillance of his citizens more aggressively than any other ruler in history, is bound to be successful. He certainly thinks so, and many people believe him. I do not. Explaining why will require a thumbnail history of the Communist Party of China. 

The first person to dominate the CPC, Mao Zedong, unleashed the Great Leap Forward, which caused the death of tens of millions of people. This was followed by the Cultural Revolution, which destroyed Chinese traditions and institutions by torturing and killing the cultural and economic elite.

After Mao’s death brought an end to this turmoil, a new leader emerged. Deng Xiaoping recognized that China was lagging woefully behind the capitalist world. Embracing the credo, “Hide your strength and bide your time,” Deng invited foreigners to invest in China, and this led to four decades of miraculous growth that continued even after Xi came to power in 2013.

Since then, Xi has done his best to dismantle Deng’s achievements. He brought the private companies established under Deng under the control of the CPC and undermined the dynamism that used to characterize them. Rather than letting private enterprise blossom, Xi introduced his own “China Dream,” which can be summed up in two words: total control. That has had disastrous consequences.

In contrast to Deng, Xi is a true believer in Communism. Mao and Vladimir Lenin are his idols. At the CPC’s centennial celebration, he was dressed like Mao while the rest of the audience wore business suits.

According to the rules of succession established by Deng, Xi’s term in power ought to expire this year. But Xi, inspired by Lenin, has gained firm control over the military and all other institutions of repression and surveillance. He has carefully choreographed the process that will elevate him to the level of Mao and Deng and make him ruler for life. To accomplish this, Xi had to reinterpret the CPC’s history to show that it logically leads to his appointment as paramount leader for at least another five-year term.

But Xi has many enemies. Although no one can oppose him publicly because he controls all the levers of power, a fight within the CPC is brewing, and it is so sharp that it has found expression in various party publications. Xi is under attack from those who are inspired by Deng and want to see a greater role for private enterprise.

Hitting a Wall

Xi himself believes that he is introducing a system of governance that is inherently superior to liberal democracy. But he rules by intimidation; nobody dares to tell him what he does not want to hear. As a result, it is difficult to challenge his views, even as the gap between his beliefs and reality has grown ever wider.

The gap is apparent in the economic crisis China is facing. Since Xi came to power, the real-estate market has been the main engine of economic growth. But the model on which the real-estate boom is based is unsustainable, because it is built entirely on credit. Local governments derive most of their revenues from selling land at ever-rising prices, and people buying apartments must start paying for them even before they are built.

Eventually, prices had to rise beyond the level that ordinary people could afford. That happened in the middle of 2021. By then, the boom had grown to an unhealthy size, accounting for nearly 30% of the economy and eating up an ever-increasing amount of credit.

After accelerating gradually, the property boom ended with a bang. With residential land prices in June 2021 more than 30% higher than they had been the year before, the authorities tried to slow the pace of appreciation and ordered banks not to increase lending for residential real estate.

The directive had the opposite effect from what was intended. Credit rationing made it difficult for the largest and most leveraged developer, Evergrande, to meet its obligations. Subcontractors who didn’t get paid stopped working, and people who had bought apartments started to worry that they might never receive the homes they were paying for.

When the main selling season started in September, there were many more sellers than buyers. For a while, there were hardly any transactions at the advertised prices, and prices for both land and apartments are starting to fall. That will turn many of those who invested the bulk of their savings in real estate against Xi.

Evergrande has been placed in receivership, and other developers face a similar fate. The firm’s creditors soon started fighting to improve their position in receiving bankruptcy distributions. The courts took charge, and their first move was to protect the subcontractors, who employ some 70 million migrant workers.

It remains to be seen how the authorities will handle the crisis. They may have postponed addressing it for too long, because now people’s confidence has been shaken. Xi has many tools available to reestablish confidence – the question is whether he will use them properly. In my opinion, the second quarter of 2022 will show whether he has succeeded.

The current situation doesn’t look promising. Making matters worse, China also faces a serious demographic problem. The birthrate is much lower than the published figures indicate. Experts calculate that the actual population is about 130 million lower than the official figure of 1.4 billion. This is not widely known, but it will produce labor shortages, slow the economy, aggravate the real-estate crisis, and heighten fiscal strain.

The Revenge of the Virus

China is encountering serious problems with COVID-19 as well. The Chinese vaccines were designed to deal with the original Wuhan variant of the coronavirus, but the world has been struggling with others, especially Delta and now Omicron. Xi couldn’t possibly admit this while he is waiting to be appointed for a third term. He is hiding it from the Chinese people as a guilty secret.

All Xi can do now is to impose a “zero-COVID” policy, which entails severe lockdowns at the slightest sign of an outbreak. But this is having a negative effect on economic activity and is inflicting severe hardship on the people who are instantaneously quarantined wherever they are. The authorities will not be able to silence their complaints for long.

After all, those complaints are bound to multiply. Omicron entered China mainly through the port city of Tianjin, which is 30 minutes by high-speed rail from Beijing. By now, it has spread to an increasing number of cities across China. It is no longer under control.

This development threatens to be Xi’s undoing. Omicron is much more infectious than any previous variant, although it is much less harmful for those who have been properly vaccinated. But, because Chinese people have been vaccinated only against the Wuhan variant, Xi’s secret is bound to be revealed, most likely during the Winter Olympics or soon thereafter.

The Winter Games are of course Xi’s prestige project, so the administration is going to incredible lengths to make the event a success. While the competitors will be isolated from the local population, continuing the effort after the Games are over makes little sense. City-wide lockdowns are unlikely to work against a variant as infectious as Omicron. This is evident in Hong Kong, where the outbreak looks increasingly serious. Yet the cost of zero-COVID is rising every day as the city is cut off from the rest of the world, and even from China.

Hong Kong highlights the wider challenge Omicron represents for Xi. He tried to impose total control but failed. As Omicron spreads, opposition within the CPC will grow stronger. Xi’s carefully choreographed elevation to the level of Mao and Deng may never occur.

It is to be hoped that Xi may be replaced by someone less repressive at home and more peaceful abroad. This would remove the greatest threat that open societies face today. Their task is to do everything within their power to encourage China to move in the desired direction.

LONDON – Dictators do not like others grading their performance. Any sort of assessment of such leaders’ successes or failures, even by their close colleagues and advisers, is a big step toward undermining them. Permitting criticism, let alone encouraging it, is out of the question.

Chinese President Xi Jinping, the Communist Party of China’s most powerful boss since Mao Zedong, must feel particularly strongly about this. In 2022, Xi will seek the endorsement of the CPC’s 20th Congress for his plan to remain in power for a third term, thereby abolishing the two-term limit established by Deng Xiaoping and adhered to ever since.

That arrangement was in part an attempt to prevent any return to Mao-like dictatorship, and it succeeded in collectivizing the CPC’s leadership. But one only has to look at the personality cult established by Xi and penetrate the meaning of “Xi Jinping thought,” which has now been incorporated into the Party’s constitution, to understand the current Chinese president’s intentions.

First, Xi’s all-embracing philosophy asserts that the CPC is the inheritor of all that is best in Chinese history and culture. Second, there is a strong element of grievance-infused nationalism. Third, and probably most important, is the instruction to party and country that they should never forget that Xi is in charge of everything from the moment people rise in the morning until they switch off the bedside light at night. And even then, Xi is still watching them and watching over them.

But even if Xi does not want others to scrutinize his record, his closest advisers must see that he may have squandered the years of peak power China had gained because of its economic strength and the problems faced by Western countries since the 2008 global financial crisis. “Post-peak” China’s existential problems will now become ever more apparent. The country is not looking so unquestionably like the new and worryingly successful power that it has been. In some ways, that makes it potentially even more troublesome and threatening for the rest of the world.

Three Problems

The most dramatic recent manifestation of China sliding past a tipping point has been the crisis at the property developer Evergrande. Comparing this to the 2008 collapse of Lehman Brothers does not seem to me a sensible starting point. The Evergrande debacle goes well beyond a huge market failure, and brings together two of the three big existential perils confronting the Chinese government.

The first is excessive indebtedness – not least in the real estate sector. Today, China requires twice as much borrowing to produce every measure of growth as it did ten years ago. Kenneth Rogoff of Harvard University and Yuanchen Yang of Tsinghua University estimate that the property and construction sectors account for 29% of Chinese GDP. Land sales are especially important for generating local government revenue, and some 78% of Chinese personal wealth is tied up in housing. Yet, China’s total debt increased eightfold between 2008 and 2019, and is now almost three times the size of its GDP.

China’s second major problem is demographic: spiraling debt and falling productivity have been accompanied by a dramatic decline in the size of the working-age population. The country’s economically active population is projected to shrink by 194 million by 2050.

Moreover, both the number of families and the fertility rate are falling as China’s skewed male-to-female ratio persists. The imbalance is greatest among the youngest age cohorts: among those aged 10-14, there are 120 boys for every 100 girls. Given China’s declining number of families, it is no wonder that the house-building boom has resulted in so many empty apartments and at least 50 ghost cities.

Xi’s response to these growing economic problems has been to double down on his commitment to increase control over China’s more productive private sector and to favor state-owned enterprises. This policy is driven by his fear of ceding control to successful big tech firms, and seeing the rewards of private-sector achievement exacerbate the inequalities that constitute a third Achilles heel of Chinese communism.

But the Gini coefficient, which measures wealth and income inequality, shows that China is now more unequal than many Western developed countries, and is approaching US levels of economic disparity. Forcing a few billionaires to hand over some of their fortunes to the state or to state-directed projects will not change much. To make China more equal, its leaders would have to dismantle the CPC power structure that shovels rewards toward the Party’s controlling regiments.

In addition to high indebtedness, unfavorable demographics, and widening inequality, Xi’s China is confronting huge resource and environmental challenges. It imports more crude oil than any other country and faces problems of food security. Meanwhile, climate change is taking its toll, in particular leading to a water shortage in northern China. The country has only 7% of the world’s fresh water, but 18% of its population, and there is a complete mismatch between where people live and where water is found.

China’s contribution to global reductions in carbon dioxide emissions is likely to be a further drag on economic growth, which in any event will probably flatline as a result of the country’s debt and demographic problems. Xi may therefore seek to retain political control through even more surveillance and intimidation as the population feels a growing economic pinch.

The Hubris of Xi

It should also be clear that Xi’s regime has overplayed its geopolitical hand. Obsessed with the idea that the United States and its liberal democratic allies were in terminal decline, Xi bragged that China was seeking “a future where we will win the initiative and have the dominant position.” Through its “wolf warrior” diplomacy, China would supposedly boss the Indo-Pacific region and show the world a model of successful totalitarianism.

But China’s neighbors – from India to Japan, South Korea to Singapore, and Australia to Vietnam – have become increasingly willing to resist Xi’s muscle-flexing. Moreover, the US has begun with some success to build cooperative partnerships with others. The aim is not to create a bamboo curtain around China as part of a second Cold War. Rather, liberal democracies want to constrain China’s bad behavior, make it pay for its bullying breaches of international agreements, and work with it when this serves the global interest – provided that China keeps its word.

The objective truth, as Marxists might put it, is that China’s aggressive diplomacy has failed. Now China will have to change tack. The danger is that Xi, whom some think is a risk-taker, may become even more aggressive. So, instead of securing the Chinese public’s tacit political agreement through economic growth, he would seek their support at a time of greater hardship by whipping up nationalist fervor – particularly over Taiwan.

An alarming number of experts now regard a Chinese attack on Taiwan as a real possibility. In many respects, therefore, these are more perilous times for all of us. Liberal democracies must discreetly but firmly make it clear to Xi’s regime that they have red lines that China must not cross, and that one of them lies in the waters of the Taiwan Strait.