With the slowdown of the Chinese economy over the past decade and its tepid recovery since the COVID-19 pandemic, President Xi Jinping made the explicit choice to boost growth through investment in manufacturing, which has replaced the property sector as the primary recipient of government largesse. With the need to bring down housing prices, speculation and debt financing, as well as to curtail overbuilding in many suburban areas, the Chinese government began the process of deleveraging the property sector in 2020 with the “three red lines” policy. However, when the economy did not bounce back after China’s abandonment of its draconian “zero Covid” pandemic policies in late 2022 and property prices continued to fall, the government began to look for new avenues to drive growth.
Manufacturing is an attractive alternative to Xi personally, for several reasons. First, Xi has demonstrated his distrust of less tangible sectors, such as finance and technology, that not only do not produce real goods, but can also lead to financial instability and the emergence of powerful new entrepreneurs and business leaders who might challenge the Chinese Communist Party’s preeminence. Second, Xi believes that China must become technologically independent of the United States and other advanced industrialized nations close to Washington. Production of goods from airplanes to semiconductors is essential to this goal. Third, Xi not only distrusts how economic development empowers capitalists who might challenge him, he is also wary of creating a consumer-driven society. He envisions a population that works hard and produces the products that the state prioritizes, not one that thrives on consuming products of their own choosing. Xi values the Chinese population for its productive capacity, but downplays Chinese people’s individual roles as citizens and consumers.
According to this calculus, China produces, while the burden of consumption falls on other economies, and this tension between China’s manufacturing prowess and the need for the rest of the world to consume in order to absorb China’s excess capacity is leading to the next trade war. U.S. Treasury Secretary Janet Yellen has warned China’s leaders that Washington will not tolerate a second “China Shock,” which could deindustrialize the U.S. at the higher end of the technological ladder.