What is going on with the Chinese economy? The headline figures have painted a rather bleak picture. Just last month, industrial production was down 2.9% year-over-year, retail sales down 9.7%, food catering revenues down 22.7%, et cetera, et cetera. This has prompted one of the CCP’s top leaders this week to chair a teleconference on “stabilizing the economy” with 100,000 or so cadres in attendance. Meanwhile, it has been reported that the US may outpace China in economic growth for the first time since 1976.

Mainstream narratives have mostly blamed the current economic situation in China on the so-called “dynamic zero-COVID policy” (动态清零政策), which not long ago, as I noted in my previous posts, was cheered in the PRC and by some “China experts” in the West as a “victory” of the CCP-led “Chinese model” in contrast to the ostensibly more chaotic responses in the West, especially in the US.

Yet, behind the periodicity of the zero-COVID disruptions is a more sinister trend that is more or less beyond the control of PRC officials: de-globalization. So far, this has been overlooked by many China-focused journalists and analysts. Ironically, the backdrop of this macro trend was the US-led hyper-globalization in the last 30 years, which, in the case of China, played out in a doubly ironic way consisting of free rides. As Professor Dani Rodrik of the Harvard Kennedy School of Government said in a recent podcast interview:

The greatest beneficiary of hyper-globalization was clearly China, but there’s an interesting paradox there. On the one hand, you can say that, look, you might feel bad for the lower-middle classes or workers in regions left behind, in Europe or in the United States. On the other hand, you had a billion people lifted out of extreme poverty, in part because of the ability of China to leverage the world economy.

But the paradox here is that China played the globalization game not by hyper-globalization rules, so it’s precisely by pursuing this set of policies that were contradictory to the spirit of hyper-globalization that paid them so well.

What do I mean by this? China had extensive industrial policies and subsidies to their infant industries, and you were not supposed to do that under the WTO rules. They managed the exchange rate – well, you were not supposed to do that under the rules of financial globalization. They had controls on capital movements across the border, when you were not supposed to do that under the rules of financial globalization. They violated intellectual property rights and many of the other rules of the WTO in spirit, if not exactly in letter.

So the paradox is that China did so well not because it followed the tenets of the hyper-globalization period, but precisely because it was essentially free-riding on the openness of other countries.

The ongoing trend of de-globalization, however, is effectively ending the PRC’s free ride, as the “globalization bus” is heading elsewhere, figuratively speaking. Factories are re-shoring, and economies are de-coupling. China can get off and find another bus to free-ride on, or it can build one of its own, or—to follow in the footsteps of its good friend Russia—it can try to take off the steering wheel. But this old bus will no longer take China where it likes to go, as it once did.

Compound that with the PRC’s increasingly restrictive domestic economic policy, its long-accumulated debt problem and low productivity growth, as well as its worsening birth rate and labor shortage. What we are seeing in the Chinese economy today may just be a harbinger of a much more challenging situation that could occur in the coming decade and beyond.