LONG-FORM COMMENTARY: China’s Economic Decline is Imminent—Which Spells Trouble for Taiwan

Andrew Zeng, Stanford University

Recent scholarship on the question of whether Taiwan will face an imminent invasion from the People’s Republic of China (PRC) has been divided into two diametrically opposing camps, with neither camp seemingly able to achieve a decisive advantage over the other. The problem stems largely from the fact that the Chinese political system is notoriously opaque; as a corollary, it is nigh impossible to extrapolate its intentions exclusively from its leaders’ speeches and public-facing communiques. So as Xi Jinping and other Chinese leaders deny the statehood of Taiwan in increasingly provocative and aggressive terms, the central problem for American and Taiwanese policymakers is to deduce whether their statements are pretense or preparation.

Among the scholars who believe the PRC is bluffing is Timothy R. Heath, who in a December 2022 article in War on the Rocks, stated that after a “careful consideration of the evidence,” there was “a conspicuous lack of evidence that the government has decided to pursue a military solution to the island.” Heath’s argument proceeds as follows. First, while Xi Jinping has directed the People’s Liberation Army (PLA) to initiate plans for a military invasion of Taiwan by 2027, CIA director David Cohen and other top officials have stated that China “intends to get control” of Taiwan through “non-military means.” Heath synthesizes these two contradicting pieces of evidence by extrapolating that Xi could have raised the matter of a Taiwanese invasion only as a contingency, which is logical given that Taiwan is China’s main national security concern. The 2027 date, meanwhile, coincides with the 100th anniversary of the PLA’s founding, meaning it could have been chosen as an evocative modernization goal rather than as a countdown to war. Perhaps most importantly, Heath points out that China has not redirected its focus away from economic growth, and it has not begun indoctrinating its citizens on the importance of taking Taiwan by any means necessary. All of this, Heath states, points to a single conclusion: a Chinese invasion of Taiwan is far from imminent.

But what Heath and others like him fail to take into account is the mercuriality of authoritarian leadership and the fact that, as Hicham Alaoui puts it, “political regimes are not static.” Indeed, within the next half-decade, China will experience a series of changes that could wreak havoc on its economy and lead it to lose pace with the United States. These changes include the demographic legacy of the one-child policy, the collapse of a housing bubble, and fallout from its draconian zero-COVID policy. These three factors could, in conjunction, cause China to realize that if it does not invade Taiwan immediately, it may never get the chance; as a result, there could emerge a strict time window under which China would have to act. The economic decline of America’s fiercest peer-competitor, then, might prove even deadlier than its continued growth. Given the timescales on which many scholars believe China’s economic decline could occur, an invasion of Taiwan within the next half-decade is a very real possibility, and adequate research should be taken to guard against it.

The End of the “Asian Century”?

The infamous “one-child policy” was drawn up by rocket scientists and statisticians during the reign of Deng Xiaoping in the service of a “wealthy and strong” China. The conventional wisdom was that a smaller population would help China attain a higher GDP per capita and foster the conditions necessary for economic modernization; but in practice, the policy led to several negative effects. While China did at first achieve some “demographic dividend” from the policy, as it stands, more and more people born before the institution of the policy are retiring. As the number of retirees in China grows, the strain on workers to support those retirees increases, leading younger workers to become frustrated, overworked, and disillusionedand that is playing a part in China’s slowing economic growth. In addition, many traditional families were documented to have killed off female offspring in the hopes of getting a son, both because of gender discrimination and because of the belief that males could earn more to support aging relatives. This has led to a sex ratio imbalance, with 110 males for every 100 females in China. In 2021, the China Population and Development Research Center, a state think tank, predicted that China’s demographics would reach a turning point sometime between 2026 and 2030, during which its population growth would become negative. The government has tried to do its part to address these issues by making “timely adjustments,” but it is likely too late to avoid the worst effects. As these trends continue, more and more of a burden will be placed on China’s economic growth, and consequently, its geopolitical power. There is no easy fix, and any effects may have to be taken as a fait accompli in the near term.

In addition, a dire housing crisis fueled by unwise government policies and speculation from private firms has taken shape in China. For decades, a property boom buoyed the Chinese economy, and construction companies made so much profit that the value of construction output made up 25.7% of China’s GDP by 2021. Chinese citizens flocked to buy homes from real estate developers, taking out enormous sums in mortgages. This was in some part directly fueled by the one-child policy’s creation of a “mother-in-law economy,” in which the sheer imbalance of men to women led men to have to buy homes as part of proving themselves worthy to their prospective mothers-in-law. And as the money kept pouring in, Chinese real estate giants like Evergrande grew their empire exponentially by taking money from their clients and investing it in new properties before they actually built any of the clients’ homes, in what Martin Farrer called a “Ponzi scheme by any other name.” Because prices couldn’t rise forever, sooner or later the market would implode. In August 2020, the Chinese government introduced the “three red lines,” a set of financial regulations designed to try to rein in Evergrande and other real estate firms and to stave off liquidity crises. But some firms, like Evergrande, were unable to meet any of the “lines,” and soon enough, the market began to spiral. Today, 12% of existing Chinese homes across 28 major cities sit unoccupied, and 40% of Chinese developers are in financial distress. Disturbingly, Evergrande owes its buyers 2% of China’s entire GDP; recognizing that the developer might just be too big to fail, China eased restrictions and put together a rescue package in November 2022. Though the stocks of major developers did somewhat bounce back, scholars from Nomura stated that there were no signs of a corresponding bounceback in consumer demand for new properties, and, as China scholar Michael Pettis states, the nature of the Chinese economic system means that there will be a “long slow adjustment rather than a quick brutal adjustment,” reminiscent of the Lehman Brothers crumbling. The effects of the crisis will therefore likely linger for at least the next few years, all the while eating away at China’s economic growth and power.

Until December 2022, China had maintained a strict “zero-COVID policy” that included aggressive lockdowns, lengthy quarantine periods, and large amounts of PCR and rapid testing. Even as more aggressive variants like Omicron began to sweep through the nation and infections rose despite the strategy, Xi and other Chinese officials continued to stick by the policy, with Xi himself stating that he “put the people and their lives above all else” and that he had “protected the people’s health and safety to the greatest extent possible” in his speech at the 20th Party Congress. While China did experience far fewer deaths from COVID-19 than countries like the United States, the policy had significant economic and personal effects. In a piece on Project Syndicate, economist Shang-Jin Wei estimated that the policy lost China roughly 384 billion USD in GDP when compared to the CCP’s own economic projections; while he goes on to argue that the cost was worth the lives saved by the lockdowns, the fact remains that the policy had an outsized impact on China’s economic future. In addition, after having lived under the policy for over two years, protests erupted across major Chinese cities in October and November 2022. On Beijing’s Sitong Bridge, an unnamed protester displayed a banner reading “we want freedom, not lockdowns” and “we want to be citizens, not slaves.” In Zhengzhou, workers at a Foxconn mega-factory clashed with police after they were prevented from leaving the facility as part of the policy. And on November 24th, a building in the Xinjiang capital of Ürümqi caught fire, but firefighters who arrived were hampered by blocked entrances and locked doors mandated by the policy, so it took three hours to put out the blaze. The fire served as a rallying cry for protesters around the country as they demanded an end to zero-COVID, with some going as far as to call for the resignation of the CCP and Xi Jinping. The protests were the largest in China since the fateful Tiananmen Square movement of 1989, and they effectively forced the CCP leadership to begin easing restrictions.

But the easing of restrictions itself was bungled; while Xi had originally planned for a gradual transition, by the end of December, the key elements of the zero-COVID policy were gone, reporting on COVID infections was completely scrapped, and China reopened itself to foreign visitors. The result was, predictably, a massive increase in COVID infections and fatalities (with internal estimates set at 250 million people infected in the first twenty days of December), as much of the population had not yet been vaccinated, and those that had used vaccines that did not have the efficacy of mRNA-based models. An article by Smriti Mallapaty in Nature magazine stated that models predicted that China could see a million deaths from the sudden end of its policy, eroding the Chinese people’s faith in the CCP’s governance and potentially cascading to even more devastating effects on the Chinese economy. The exact scope of the fallout will likely depend on how exactly the CCP responds, and how effective it is in getting citizens vaccinated, fast. But either way, the economic impact of the zero-COVID policy and its subsequent lifting will be drastic and will gradually weaken China’s economic and geopolitical power in the next few years.

With all of this said, it is worth looking at the potential foreign policy implications of China’s economic decline.

The Implications for China’s Foreign Policy

Writing in the fifth century BC, the Athenian scholar-historian Thucydides tried to make sense of how the great power rivalry between Athens and Sparta, the two premier powers of the time, had given rise to the most destructive war of his time and place. In his monumental History of the Peloponnesian War, Thucydides came to the conclusion that the “real cause” of the conflict “was the growth of the power of Athens, and the alarm which this inspired in Lacedaemon,” and that it was this that had “made war inevitable.” Since then, many scholars have seized upon Thucydides’s explanation of a shock to the “balance of power” to explain how interstate wars arise. Perhaps foremost among these scholars is Graham Allison of Harvard University, who documented 16 cases in the last 500 years in which a rising power threatened to become more powerful than a ruling power; 12 of those cases ended in conflict. To explain this dynamic (“the severe structural stress caused when a rising power threatens to displace a ruling one”), Allison published a book titled Destined for War?, in which he coined the “Thucydides Trap.” In the book, Allison described how an economically resurgent China could threaten to displace the US at the top of the global pecking order in terms of geopolitical power and influence, and that the resulting tensions between the two states could potentially lead to war. Allison explained that such a war would be disastrous, not least because both states are nuclear-armed powers. In the end, Allison provides not a comprehensive plan for world peace, but rather only the advice to reflect seriously on the current US-China relationship and on how to redefine it.

At the time he published the book in 2017, however, Allison probably would not have thought that in the end, it might be China’s fall that could trigger great power war. The broader case of the Thucydides Trap is the concept of a “preventive war,” in which a state which is in relative decline to another state decides to attack because it believes it will no longer have the chance to in the future. The concept of a “preventive war” forms one of five “Rationalist Explanations for War” proposed by Stanford professor James Fearon in a 1995 article. Another, perhaps equally important explanation, stems from the concept of “issue indivisibilities.” This all comes into play when considering the current struggle over Taiwan. For China, Taiwan is absolutely indivisible; it has repeatedly reiterated that in the end, it will accept nothing less than the complete reintegration of Taiwan within the Chinese fold. The Americans and, more acutely, the Taiwanese, seem currently unwilling to accept a state of affairs in which China gains complete control of Taiwan and incorporates it as just another Chinese province. This makes it so that reaching a workable bargain is extremely hard at best, and nearly impossible at worst. Given the indivisibility of the issue, the US and China are currently only postponing any resolution on the Taiwan issue, and the only question left to ask is the timescale on which China might act to take back control of Taiwan—a question that can be answered by considering the value to China of fighting a “preventive war” while it still might be at its economic peak.

China will face extreme economic and societal pressures within the next few years. These pressures will lead to a hampering of economic growth that could in turn feasibly result in a decline in power relative to the US. At this point, it is important to consider that the Chinese government is, at least to some degree, aware of the issues which might plague it in the next few years, and that the Xi administration has taken some concrete steps towards addressing many of them. Still, it may be a case of too little, too late. And if the administration believes that China’s relative decline is inevitable, it could decide that the best time to take back Taiwan is now. This is what Heath fails to consider when he states that an invasion of Taiwan appears, despite all evidence to the contrary, not to be imminent. China is making any preparations it can for war without seeming outright hostile to the US, as an immediate escalation of warlike language on state TV networks would undoubtedly do. And while the Chinese economy continues to grow (albeit at a slower pace than before and at a miniscule rate higher than the US), it could come toppling down in an instant. Given this, it is fair to wonder whether at its peak, China would really accept falling so far behind the US that any ambitions it has of retaking Taiwan become little more than a pipe dream. In such a circumstance, there is a real and significant chance that China could attempt to retake Taiwan. Such a scenario could come dangerously soon, and policymakers and decision-makers at the upper echelons of the US government should have their eyes transfixed on China’s circumstances and actions, so that adequate planning will be in place in the event of a Taiwanese invasion in the near future.

A Repugnant Conclusion

To his credit, Mr. Heath does advise to “closely monitor Chinese military deployments and ensure appropriate deterrence.” It’s certainly a positive step, but much more would be necessary to ensure that American interests are protected. The US would need to monitor China’s economic situation closely and take note of any changes in rhetoric at the highest levels of the CCP that could be indicative of a wider policy shift towards preparing for an invasion of Taiwan. Importantly, US policymakers should not make the mistake of viewing any Chinese economic decline with euphoria, but rather with a cautious eye. A weaker China, after all, is also a more desperate China.

Whether all of this means the US should provide more economic aid to China, or establish closer economic ties in order to forestall a preventive war, is an open question. It is likewise not obvious what the US should do if China were to start mobilizing its propaganda and military forces in preparation for an invasion of Taiwan in the near future. But if the costly war in Ukraine has taught the US anything, it is this: that it is essentially impossible to put too many resources into planning for the contingency of an invasion of Taiwan, and that well-defined and executable policies, as well as an accurate understanding of what signals transmitted by the Xi administration mean, are critically important to responding to conflict in a timely and accurate manner. It is crucial that the American foreign policy apparatus continue to pay close attention not only to China’s rhetoric and actions surrounding Taiwan, but also subtle cues stemming from China’s economic situation itself. Only then can the US be prepared for the years ahead.

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