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2 Major Traps on China’s Path to Global Leadership

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2 Major Traps on China’s Path to Global Leadership

There are at least two major obstacles that China will have to get over on its path to global leadership, one domestic and one outward-facing.

2 Major Traps on China’s Path to Global Leadership
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Chinese authorities are anything but humble when they set out their long-term vision: making their country a leading economic and technological power by 2049, the 100th anniversary of the creation of the People’s Republic of China. The Chinese don’t just want to be a superpower – they believe that they deserve to be one, that it’s their destiny to lead the world.

Chinese leaders are convinced that we’re witnessing the end of the post-Cold War Pax Americana and the transition to a new world order, which will ultimately find China in the driver’s seat. The vast majority of official pronouncements exude the utter conviction that the U.S. and the Western liberal order are in terminal decline, while there are very few lonely voices that question the precise degree and speed of that decline.

China has indeed made spectacular and truly unprecedented progress over the past 40 years or so. But is it likely to achieve the ambitious objective set by the CCP? There are at least two major obstacles – or, rather, sets of obstacles – that China will have to get over on its path to global leadership. The first set of obstacles relates to China’s political and economic governance (“the middle-income trap”), and the second to Beijing’s capabilities to claim a leading role in the international arena (“the Kindleberger trap”).

The Middle-Income Trap

Statistically, China already stands at the doorstep of the high-income club, with an average per capita income at $12,555 in 2021. Chinese authorities vehemently reject the middle-income trap theory, which posits that the growth potential in the majority of export-driven low-skill economies is exhausted before the countries in question attain the innovative capability they need to compete with developed countries in higher value-chain industries. Yet, the severe headwinds China’s economy is increasingly facing show that this discussion is not irrelevant.

China’s slowdown should not be attributed exclusively to the disastrous impact of the zero-COVID strategy as a temporary drag on the economy. The pandemic has merely exacerbated a host of structural deficiencies that were obvious even before the coronavirus outbreak in 2020. China is reeling under the deadweight of excessive debt, caused by massive misallocation of capital and obsession with costly infrastructure that is not always needed. The real estate bubble, with the liabilities of the Evergrande behemoth alone accounting for 3 percent of China’s GDP, may be the most serious crisis China has faced in the past 40 years. In fact, unsustainable investment in housing and infrastructure has become the single biggest source of bad growth in China.

Add to that a rapidly aging population, which will also sap China’s future growth prospects due to a shrinking workforce, coupled with low levels of educational attainment. While China performs well on many measures of innovation, adding quality alongside quantity in this process will be crucial to the CCP’s ambitions. As a result of all the above predicaments, China’s total factor productivity (TFP) growth has been steadily declining since 2010, when the country bade farewell to double-digit growth rates. Clearly then, most of the fall in GDP growth rates merely mirrors the decline in TFP growth.

Chinese authorities have been trying to tackle industrial overcapacity, local debt mountains and shadow banking, the property bubble, and to spur innovation across the board. Key policies of the Chinese government aim to help rebalance China’s economy, wean it off its predominantly export-driven model, promote state-of-the-art technologies, tap into the huge domestic market, and make the country more self-sufficient. Yet, many of these efforts are falling flat. The shift from a nation of shippers to a nation of shoppers has turned out to be much more difficult than expected: Domestic consumption remains weak, while Chinese exports have hit record levels thanks to generous state support provided to manufacturing.

Clearly, noble intentions and lofty pronouncements by China’s leaders do not ensure the turn to an entirely new innovation-based paradigm, which would help the country overcome the middle-income trap. While few watchers see a systemic risk in China at this stage, the country’s economic “miracle” seems to be well past its peak and the long-term outlook of its economy is turning dimmer with the passage of time. China is widely expected to overtake the U.S. in terms of its nominal GDP, but there is a universal consensus that this may take longer than was initially thought. In order for China to surpass the United States by 2035, its economy would have to grow at 4 percent a year; however, annual economic growth could well drop to 2-3 percent in the coming years. And there are persistent doubts lingering over the credibility of Chinese statistics, meaning that the much-trumpeted doubling of the country’s GDP and per capita income between 2020 and 2035 should not be taken for granted.

The Kindleberger Trap

And, as if these internal challenges weren’t enough, China will have to address the even more challenging “Kindleberger trap” on the international arena. Charles Kindleberger, a prominent American economist, has argued that leading powers have the responsibility to provide global public goods, such as peace, security, stability, prosperity, a clean environment, and more. China clearly aims to position itself as a leader in 21st-century global governance, but how likely is it to acquire the capabilities to act as a responsible global power? Its prospects are mixed, at best.

China has risen to the position of the second largest economy worldwide and can rightfully boast impressive achievements as a testimony to its rising engineering and scientific prowess. There’s no doubt it’s making advances in the ever-intensifying tech competition with the United States. It is closing on the U.S. in terms of R&D spending as share of its GDP, even though Chinese institutions are still more into applied rather than basic research, i.e. imitation at the expense of genuine innovation. Chinese universities are becoming markedly stronger in Science, Technology, Engineering, and Mathematics (STEM).

In the battle for artificial intelligence (AI) supremacy, China now publishes more papers on related topics than any other country, though U.S. and European papers are still cited more often. Research efforts are well underway in the fields of quantum computing and communications. China is clearly dominant across green technologies domains, such as the production of solar panels, and CATL is a world leader in the area of batteries for electric vehicles. China’s large deposits of strategically important rare earths or access to related natural resources overseas also give it a comparative advantage over competitors.

At the same time, there are areas where China is still lagging behind key competitors, the sector of semiconductors being a case in point. The state-owned Semiconductor Manufacturing International Corp (SMIC) has gobbled subsidies worth tens of billions of dollars, but is still reliant on state-of-the art Western equipment.

By the end of 2021, China’s share in the global economy had exceeded 18 percent and is set to keep growing. However, recent IMF analysis shows that China’s slowdown has become increasingly painful, with major consequences for the global economy. And, while the Chinese renminbi is one of the reserve currencies, it has not been able to challenge the financial hegemony of the U.S. dollar.

Another big challenge to China’s prospects as a driving engine of global development is presented by the checkered track record of the Belt and Road Initiative (BRI), once hailed by Chinese leader Xi Jinping as the “project of the century.” Many reports of late have uncovered a mountain of non-performing loans provided by Chinese policy banks to recipient countries and the BRI now risks metastasizing into a series of controversies and debt crises.

Mounting problems do not obscure the fact that in many developing countries construction with Chinese finance has yielded some much-needed infrastructure. But a number of “white elephants” and the debts piling up have dealt a serious blow to China’s image as a competent and reliable partner of the Global South. The big question now is whether and to what extent Beijing will participate in multilateral debt relief efforts in BRI recipient countries. Ironically, a multilateral approach is counter-intuitive for Beijing because the BRI has been designed with a strictly bilateral and Sino-centric logic.

It may be even more difficult for China to ensure global public goods in the areas of peace and security. China is a major contributor to U.N. peacekeeping operations, second in terms of financial inputs and ninth as to the number of troops. On the face of it, this may seem impressive, but it doesn’t really match the country’s size, economic heft, and ambitions. The Global Security Initiative (GSI) presented by Xi Jinping in April 2022, is a set of generic statements and little content. The GSI may find resonance in some developing countries, where frustration with elements of the U.S.-led order is manifest, but it is highly unlikely to be endorsed by Western allies. In fact, the GSI signals Xi’s attempt to create a platform for China’s own partnerships.

Beijing’s credibility is severely undermined by its fence-sitting on Russia’s invasion of Ukraine and lip service to the notions of “sovereignty” and “territorial integrity,” as it has essentially endorsed Moscow’s narrative about the war. In fact, instead of consistently upholding values, the new hymnbook of Chinese diplomats is marked by a flexible approach to inconvenient questions, “based on the merits of the issue.” So far, China appears to shy away from undertaking global responsibilities on a par with its status and pronouncements.

Nor is Beijing committed to the stability of the existing global architecture with its vision of a new world order, as laid out in the joint Sino-Russian manifesto released in February 2022. Xi and Putin have embarked on nothing short of an anti-Western illiberal crusade that brings Western nations closer together against Beijing and Moscow alike. While China is making inroads into the Global South, it is antagonizing the West as a broad constellation of allies and like-minded partners, whom Beijing tends to view as “U.S. poodles.” The Quad formation or the trilateral AUKUS deal largely relate to China’s rise over the past few decades and its assertive posture under Xi. The recent show of military force around Taiwan in the wake of U.S. House Speaker Nancy Pelosi’s controversial visit raises additional questions about China’s commitment to the peaceful resolution of complex geopolitical disputes.

China’s potential leading role on a global scale is even more questionable in the area of public health. In the wake of the 2003 SARS epidemic and above all the outbreak of the COVID-19 pandemic in 2020, Beijing is clearly on the back foot. A raft of anywhere-but-here conspiracy theories have done more harm than good to China’s image. The Health Silk Road, heavily promoted by the CCP government as part of its propaganda counteroffensive, has now sunk into near-oblivion, despite the sales of Chinese vaccines, masks, and other supplies to a number of countries. Nor does it help that the Chinese vaccines do not match the efficacy of Western mRNA vaccines. And future outbreaks in China cannot be precluded: New pathogens, such as the Langya virus, are already being reported.

Just as worryingly, China is an unlikely global leader in the containment of the existential climate crisis. Despite its massive investment in green technologies, China is still the most polluting nation on the Earth in absolute figures, accounting for more than a quarter of world carbon emissions. Beijing’s commitment to carbon neutrality by 2060 does not reflect the urgency of the matter, nor is this commitment confirmed by China’s decision to suspend climate talks with the U.S. in the wake of Pelosi’s visit to Taiwan.

Given all the above developments, China’s global image has deteriorated markedly over the past few years. This will not negate its ability to wield vast economic and military power in its own neighborhood or further abroad. But Beijing’s reputation and overall soft power have bottomed out, despite a wide range of efforts to expand its public diplomacy. Ironically, China’s charm offensives are undermined first and foremost by its increasingly pompous rhetoric, confrontational diplomacy (including its notorious “wolf warrior” tenet), and the undisguised use of economic coercion applied to countries that are less than infatuated with Beijing leadership ambitions.

A Mix of Ambition and Angst

Many analysts put a significant weight on past performance when thinking about China’s future trajectory. But the golden era of rapid Chinese economic growth is gone and the country’s further progress is not guaranteed, as it will require profound structural reforms that may prove politically difficult. Under Xi Jinping, the role of the state in the economy has become ever tighter, and this will further hold back productivity growth.

For all that, China’s sheer size guarantees that the country will remain a key driver of global growth, though it is less clear to what extent. Despite signs of intensifying diversification, China will retain its pivotal role in global supply chains and strong – if not leading – position in a number of sectors. It will obviously be an economic giant and, despite its low productivity, will continue to wield enormous market power.

China will most probably become the world’s largest economy, but it is unlikely to enjoy a meaningful lead over the U.S. and will remain far less prosperous. With long-term average economic growth of 2-3 percent, China will lack the economic heft needed to compete with Western economies as a group; for example, in terms of its ability to devote resources to science and innovation, military spending, or financing overseas infrastructure projects.

No doubt, Beijing will seek to increase its outreach and global sway through its strong presence in the U.N. or by means of institutions structured around China, such as BRICS, the Shanghai Cooperation Organization (SCO), the Asian Infrastructure Investment Bank (AIIB), and others. However, the gap between China’s rhetoric about multilateralism and its preference for bilateral relations with the vast majority of countries won’t vanish.

Beijing will continue to act as an agenda-setter, mostly in the name of the Global South, even though a number of developing nations will increasingly ask themselves whether China is a partner or a predator. Beijing’s foreign policy to prospective allies will probably remain a cocktail of pledges and pressure, if not veiled coercion. China’s weak soft power and negative image in the West will inevitably constrain its international clout and global leadership.

A visibly weakened United States, distracted by its own domestic challenges, is definitely losing ground, but China does not seem to be ready to replace it as a global leader. Notably, Beijing seems to be driven by an odd mix of ambition and angst, and this is where the middle-income trap meets the Kindleberger trap. While the ambition is clear, the angst derives from a creeping suspicion in Beijing that China’s future may prove to be vastly different from the dominant narrative of its incessant rise. Precisely because things may not pan out as previously expected, the CCP is getting ahead of itself and is increasingly turning to a nationalistic rhetoric. This will render China considerably more dangerous and anything but a responsible global leader.