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China's True Test: a Stumbling Nation

Updated: Sep 13, 2023

By Joseph Skinner

China is undergoing a period of turmoil. Its economy is suffering from the coronavirus and an ageing population which is compounded by a hostile foreign policy from the USA and Japan. As China scrambles to recover from the Covid-19 crisis, the question is: how consequential will these problems be to its aspirations to become the leading superpower?


A Labour Crisis

The Chinese government announced Tuesday, that China’s population declined in 2022. The first time in 60 years. As a result of family size restrictions, China is confronting the same pressures South Korea and Japan are dealing with right now.

However, unlike South Korea and Japan, China is facing this issue far sooner in its economic lifespan, without the necessary investment into medical and elderly care which is required. China was only expected to hit this population peak in 2030, providing worrying signs for its economy as much of its working-age population enters retirement, burdening its weak pension system.

The crisis has been on the horizon for several years, ever since the potential consequences of China’s drastic one-child policy were recognised. The policy has not only limited the population’s workforce but also reduced the proportion of women in the population. As families were limited to one child, this led to the abandonment or abortion of female children.

The Chinese government has recognised the impending economic crunch, easing its one-child policy to allow for two children at first and now allowing for three children per family. However, these measures aren’t enough to save China from the shockwaves of such an invasive domestic policy.

A study by the YuWa Population Research Institute, a think-tank based out of Beijing, showed that among advanced economies, only South Korea was identified as a more expensive country in which to have a child.

Furthermore, social pressures on women are dampening the effects of China’s one-child policy reversal, with many women choosing to delay marriage and not have children. Women in China remain sceptical of the government’s ability to help them with family-related costs, including high housing prices, education costs, and healthcare costs.

Economic Fallout

China’s massive working-age population has powered the global economy for the past decades, an axiom that is already changing. As manufacturing costs have risen, companies have left for countries like Mexico and Vietnam for their cheap labour.

Moreover, China’s labour issues are spelling trouble for its pension system, which is expected to run dry by 2035 with most Chinese pensioners relying on state pensions as a key source of income.

China’s solution has so far been the one-dimensional reversal of the one-child policy. However, to tackle the issue China will have to use several prongs. As of yet, China has refused to loosen its strict immigration rules to bolster its workforce, having historically issued few green cards.

On the other hand, the most important remedy to China’s long-term economic issues is increasing the efficiency of its workforce through training and automation.

China Insists that its Economy is Fine

China argues despite economic issues, that it is open for business. After three years of Covid, it once again sent a delegation to the World Economic Forum (WEF) in Davos to assure investors that in China business is back to normal.

The reversal of its coronavirus policy has prompted the government to insist that its economy will make a significant turnaround in 2023, and be back on its feet by spring. There are signs of the winter of coronavirus thawing with airports full again, traffic jams taking place and a resurgent stock market. Higher retail spending and industrial production indicate further that China is emerging from the gloom of Covid.

State Intervention into the Economy

Nevertheless, China still faces a multitude of issues undermining its political and economic hegemony. It has lost momentum both geopolitically and geoeconomically. Under the CCP's authoritarian guidance, it has forced businesses out of the country.

While low-skilled labour has left for Vietnam and Mexico, many highly skilled entrepreneurs have left for Singapore due to the crackdown on the private sector. Jack Ma, the co-founder and former chairman of the e-commerce giant Alibaba used to be a familiar face at WEF Davos, however, he now maintains a low profile after he disappeared from the public eye in October 2020. Foreign demand has also fallen with the oppressively high-interest rates implemented in the USA and to a lesser extent in the EU.

Security Fears

On the geopolitical side, China faces an increasingly wary world scrutinising its expansionary aims. China is one of Russia’s few remaining allies while it wages its war in Ukraine, and has put it under intense scrutiny.

With Russia’s invasion of Ukraine, security fears have been heightened and the possible threat of a Chinese invasion of Taiwan appears much more real. This has prompted countries to increase military spending, reaffirm alliances, and prepare for such an eventuality.

Under new prime minister Fumio Kishida, Japan has begun a remilitarisation process in part due to the threat of China. Only recently, China lobbed missiles over Taiwan, landing in Japanese waters for the first time.

The USA has eagerly taken this opportunity to help establish Japan as a counterweight to Chinese power and mitigate its dominance in east Asia. Kishida also met with Canadian and European leaders, signing a defence agreement in London.

Meanwhile, the USA is also lobbying countries such as the Netherlands and Japan to mitigate technological exchange with China to limit China’s access to semiconductor manufacturing technology, a vital step in China’s development.

China has decried America’s approach, that America must “abandon the Cold War mentality”, a frequent Chinese criticism of the containment of Chinese influence and expansion.

China’s Dilemma

The problems facing China are severe and plentiful. Its economy faces an unparalleled shift in demographics, which is expected to precipitate a long period of population decline, which will allow India to overtake it in terms of population size later this year.

Covid has proved a serious challenge to the Chinese economy hobbled by authoritarian intervention. Meanwhile, its ally Russia has provoked the unification of the west, limiting Chinese expansionary power both politically and economically.

China has serious issues to tackle as it attempts to shake free of coronavirus. It faces economic pressure from the west, while America tries to undermine its expansionary foreign policy. New actors have entered the fray in Japan’s shedding of pacifism, while countries prepare to repel any Chinese aggression.

China already faces a changing world order, and if it manages to regain its footing by spring, it faces a potentially long period of political and economic stagnation until it is able to recapture the momentum that has defined China in the 21st century.

Sources: The New York Times, The Guardian, The Economist, CNN, NPR

Written by Joseph Skinner

January 2023

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