China’s economic slowdown is driven by politics rather than by market forces alone, according to one of Taiwan’s prominent macroeconomists.
Speaking to The Epoch Times in a recent interview, Henry Wu, whose research focuses on monetary policy, international trade, and cross-strait geoeconomics, said Chinese leader Xi Jinping has sacrificed growth to maintain the Chinese Communist Party’s (CCP) grip on power, prioritizing it over financial stability and crippling the country’s growth prospects.
The world’s second-largest economy faces mounting challenges.
Official data show GDP increased by 4.3 percent in the second quarter year over year, down from 5 percent in the first quarter and below market expectations.
Industrial profits weakened in June, dropping to the lowest of the first half of the year.
Every provincial government recorded a fiscal deficit in the first quarter, and the property sector remained mired in a years-long slump, according to Singapore-based pro-Beijing newspaper Lianhe Zaobao.
Meanwhile, the official urban unemployment rate averaged 5.2 percent in the first six months of the year.
Chinese property developers have lost about 66 percent of their total value on the mainland and Hong Kong stock markets since their 2019 peak, according to Chinese state-controlled media Yicai.
Due to Chinese authorities’ past record of manipulating and concealing data, it is difficult to assess the true scale of the country’s economic troubles.
Some local governments are admitting the strain. Authorities in Changchun, Jilin Province, recently cited “unprecedented difficulties and challenges” facing the city’s economy—a statement quickly scrubbed from the city’s website.
Reform Was Designed to Save the CCP
To understand Xi’s policy shift, Wu said, one must first understand why communist China embraced market reforms.
By the late 1970s, after a decade of political upheaval during the Cultural Revolution, China’s economy was on the brink of collapse. Then-CCP leader Deng Xiaoping responded by opening the country to foreign investment, encouraging private business, and integrating China into the global economy—a period known as the “reform and opening up” era.
However, according to Wu, the CCP’s opening-up policies never intended to abandon its political monopoly or fully embrace free-market capitalism. Instead, market reforms were adopted as a pragmatic means of reviving production, attracting foreign capital, and restoring living standards after years of economic devastation.
Deng’s foreign policy reflected the same pragmatism. His strategy, commonly known as “hide your strength and bide your time,” encouraged China to maintain a low international profile, integrate into the U.S.-led global economy, and focus on economic development until the country was strong enough to engage in geopolitical rivalry.
Wu said that many observers misinterpret Beijing’s policies because they assess them primarily through an economic lens, whereas the CCP leadership consistently places greater weight on political security than on economic efficiency. Once the economy recovered, he said, the CCP inevitably sought to reclaim the control it had partially relaxed during the reform era for fear of losing its legitimacy.
Chinese leader Deng Xiaoping (L) meeting the then British Prime Minister Margaret Thatcher in Beijing on Dec. 19, 1984. Pierre-Antoine Donnet/AFP/Getty Images
Wu said that if Chinese people broadly entered the middle class and every household had surplus savings, “the CCP would lose both its reason for existing and the foundation of its rule.”
“If the people can survive on the market, why do they need the CCP?” Wu said.
He noted that this is the key to understanding many of the contradictions in China’s economy: when forced to choose between growing the economy larger and maintaining the CCP’s grip over the state, the authorities have always chosen the latter. From this, he said that the CCP can never truly lead China to widespread prosperity.
“What Xi’s dealing with right now is the Party’s existential crisis—the one that’s been growing ever since reform and opening up began,” Wu said.
If reform and opening up were allowed to continue without limits, Wu said, it would ultimately mean the end of the CCP. Xi is reversing course because he sees himself as saving the CCP and protecting the regime—a move he believes is non-negotiable.
Crony Capitalism Replaced Market Reform
Wu said that many Western policymakers made a fundamental miscalculation about China’s economic rise. They assumed that sustained growth and the emergence of a larger middle class would eventually create pressure for political liberalization, following a path similar to that of Taiwan and South Korea.
Instead, he said, the CCP’s totalitarian nature enabled it to retain tight political control, a system that lacks effective checks on political power. Those in authority inevitably use their positions to redirect wealth and economic opportunities for their own benefit, he said.
According to Wu, this gave rise to what is commonly described as “crony capitalism”—a system in which political influence, rather than market competition, increasingly determines access to capital, business opportunities, and economic rewards.
“The CCP overthrew the old exploiting classes,” Wu said. “But it ultimately became a new exploiting class itself, extracting wealth from the very workers it once claimed to represent.”
Wu said that this authoritarian system and state-driven economic model also undermine innovation. Without confidence that inventors and entrepreneurs will retain the benefits of their innovations, incentives to invest in original research diminish.
He noted Jack Ma, founder of Chinese tech giant Alibaba Group Holding Ltd., who announced his resignation as chairman in 2018, just as the CCP ordered all publicly listed companies to establish Party organizations. Such organizations are set up in workplaces to ensure their staff’s loyalty to the CCP and oversee management’s compliance with Beijing’s rules.
In Wu’s view, these institutional constraints help explain why China continues to face structural challenges in achieving truly independent technological innovation despite decades of heavy state investment in research and development.
Strategic Rivalry
Wu said that during the reform era, China accepted a subordinate role in the global economy, integrating into Western-led markets, serving as the world’s manufacturing hub, and avoiding direct geopolitical confrontation with the United States.
That strategy changed as China’s economy grew. In his view, Beijing’s embrace of the narrative of China’s “great-power rise” marked the point at which it began moving away from the globalization model that had fueled its earlier economic success.
Cargo containers stacked at a port in Lianyungang in eastern Jiangsu Province, China, on May 9, 2022. AFP via Getty Images
Wu traces globalization itself to the end of the Cold War. With the collapse of the Soviet Union, he said, the United States perceived fewer strategic threats and became more willing to integrate large developing economies such as China and India into the global trading system.
Washington believed at the time that deeper economic integration would benefit all parties and encourage countries to become responsible stakeholders in the international order, according to Wu.
However, Wu noted that as China’s economic power expanded, the CCP increasingly prioritized strategic competition and national power over continued economic integration.
“The moment the CCP started boasting about China’s rise as a great power, it was already turning its back on globalization,” he said.
From Wu’s perspective, this helps explain the shift in U.S. policy in recent years. Rather than continuing decades of engagement, Washington has increasingly viewed China as a strategic competitor, leading successive administrations, particularly the Trump administration, to reassess the assumptions that had underpinned U.S.–China economic relations since the end of the Cold War.
In Wu’s view, China’s economic rise therefore did not lead to its becoming a democracy, as the West had anticipated.
From Economic Slowdown to Systemic Crisis
Likening China’s economy to a patient with “multiple organ failure,” Wu warned that interconnected crises in real estate, debt, local government finance, and the banking system reinforce one another into a broader systemic threat.
Ultimately, he said, avoiding a hard landing requires Beijing to face its toughest choice: prioritizing market growth over CCP control.
Tang Boyong and Tang Hao contributed to this report.
