China’s stagnating economy has forced Xi Jinping into a humiliating global retreat

The extraordinary zero Covid years didn’t help, and the widely-expected post-Covid recovery has barely materialised, with consumer and business confidence at an all-time low. 

Last summer, before the Communist Party stopped publishing the figures, over a fifth of Chinese young people were unemployed. When I was in Shanghai earlier this year, attending a business summit, the only bullish investors (Chinese or international) were those with a stake in electric cars.

There are, of course, still bright spots in China’s present and future. Renewables is one of them – Chinese EVs are set to take a quarter of European sales this year. 

March data shows that factory activity is recovering, and analysts at Citi have just upgraded their prediction for the economy to 5pc growth this year (Rishi Sunak would kill for half of that). But it’s not quite enough to arrest the concerning slowdown. China may never escape the middle income trap. What will happen to the CCP’s mandate to rule then?

When I interviewed the then foreign secretary James Cleverly at Conservative Party Conference last year, he told me that China’s slowing growth was bringing it back to the negotiating table. I was sceptical then, but in the months since we’ve seen more evidence that something of the sort really may be happening. 

First, Xi made the remarkable trip to meet Biden in San Francisco, even though Chinese leaders prefer to be on home turf. Now, the two hour phone call, which Chinese state media calls continuing “the San Francisco vision”.

That vision looks an awful lot like a Chinese retreat to cautiousness in a bid to ease the external pressure on its economy. At San Francisco and in this week’s call, Xi complained about America’s sanctions that threaten to contain China’s progress in semiconductors, AI and renewables; protested against the US’s increasingly loud support for Taiwan; and raised the issue of TikTok, which is currently being threatened with divestment from its parent company (TikTok may not thank Beijing for the intervention).

In return, the wolf warriors have been leashed, punitive trade barriers rolled back (such as the four-years-long embargo on Australian wine, which ended last week), and the Chinese and American militaries have started talking again.

Deng’s wisdom was that he didn’t drink the Communist Kool-Aid and saw China’s weaknesses and strengths for what they were. 

He knew that it wasn’t ready to take on the US, that it still had more to gain from western friendship. In return, he saw that the West craved access to China’s gigantic market. Deng’s China wasn’t necessarily a happier or freer place – but he convinced the world it was an inoffensive, well-meaning country on the route to liberalisation, somewhere the West could do business with.

Xi’s China is many times stronger, and perhaps without the pandemic it’d have soon become the world’s largest economy. But still, the average American is six times as wealthy as the average Chinese person. 

China’s semiconductors are good, but nowhere as good as the Taiwanese and South Korean alternatives; its military is large and growing, but spending is less than a third of the US equivalent. 

Crucially (and too often overlooked by its critics), China is still reliant on trade with the West – its biggest trading partners are the EU, US, and South Korea. That dependence goes both ways. Beijing has revealed its hand too soon, and now the West is trying to contain it.

Despite China’s entreaties, Biden is not backing down on sanctions on Chinese tech and renewables. Neither would he be able to – politicians and public opinion in the West have turned against China, incensed by the CCP’s bravado. 

Xi will soon find that the reputational damage can’t be fixed quickly.