China in the global order: trade partner, competitor, or systemic alternative?

FEPS Vice-President

The People’s Republic of China has emerged as an actor in global politics that propagates its own path to development and clearly distinguishes itself from the West. China’s extremely successful catch-up development model has removed one of the dogmas of the development debate – that modernisation was to be equated with ‘Westernisation’. However, in light of the re-centralisation and the re-politicisation of Chinese politics, another core question of the development debate remains to be answered: can an autocratic economy and society outperform free-market democracies in terms of innovation and growth? 

Today, China is involved in all United Nations organisations as well as in informal formats such as the BRICS or the G20 and it is trying to shape or transform them in its interests. China’s speedy progress in international institutions and the growing self-confidence that comes with this programme can only be understood against the background of the extraordinarily successful development of its economy.

China’s development model was based on export orientation, massive investment (both state and foreign), technology transfer from the West, financial repression, capital controls and a non-convertible currency. After a lengthy period of sometimes double-digit growth rates, this quantitative growth path reached its limits under premier Wen Jiabao (2003-2013). The three decades of hyper-growth resulted in the four ‘un-s’ of his reign: China’s economy was increasingly seen as ‘unstable, unbalanced, uncoordinated and unsustainable’. Since then, bringing the economy back into balance and at the same time putting it on a qualitative, sustainable and more domestic market-oriented growth course has been the central challenge of the Chinese leadership, which President Xi Jinping in particular has made his programme since taking office in 2012.

The successful development model under pressure from all sides

The deglobalisation that has set in since the financial crisis (2008-2010), and which has been massively accelerated by the Russian war against Ukraine, marks a key change in the framework conditions for Chinese development. Not only has the US viewed China as a key geopolitical opponent since Trump, but in the EU’s perception, China has gone from being the largest market to being a ‘strategic rival’, and the European Parliament has suspended the ratification of an investment deal with China that involved lengthy negotiations before the war. In view of the Russian aggression against Ukraine, the US, Europe, Japan and certain other countries are no longer aligning their policies solely with regard to economic policy. Security and defence policy aspects are also coming to the fore. Furthermore, the new dimension of Western sanctions, which go beyond anything previously known, is already having far-reaching effects on the global economy. China is vulnerable here. If access to what had been the largest export markets is restricted, other markets or one’s own domestic market are needed – neither of which is currently in sight.

Apart from shrinking export markets, China’s access to high-tech in the West is becoming more difficult. Not only has the US imposed sanctions against Huawei, semiconductor or microchip manufacturers, but in Europe, too, governments have recently banned the Chinese takeover of cutting-edge technology. Chinese investments are now being questioned, and China’s competition-distorting government subsidies for Chinese companies are being criticised, as is the unequal treatment of Western investment in China.

The developmental appeal is fading

Parallel to the foreign trade policy challenges, the ‘Belt and Road Initiative’, China’s major and highly prestigious development policy project, is also faltering. Battered by the aftermath of the pandemic, inflation and the ramifictaions of the war in Ukraine, numerous countries in the Global South are having difficulties repaying their loans. China’s self-interested lending policies are one of the reasons. The People’s Republic, it seems, is driving its Silk Road partners into the debt trap. There are also accusations that China is taking land, violating human rights and polluting the environment. And Silk Road managers often seem to behave in a way that is no less ‘colonialist’ than their Western counterparts. Today, China is the world’s largest lender: if Beijing wants to avoid a loss of reputation among the countries of the Global South and at the same time prevent a large number of loans from failing (approximately $118 billion is at risk), it has to show whether it can be more responsible in handling the developmental challenges than the West, which it criticises.

Problems are also piling up in the domestic market

The country’s domestic market is facing major cyclical and structural challenges: high private and public debt, an imploding real estate sector, over-indebted banks with non-functioning bank supervision, the progressive ageing of the population, and almost 20 per cent youth unemployment are weighing on growth. This is accompanied by extreme income inequality, persistent corruption, an explosion in housing costs and underdeveloped welfare state institutions that could compensate and socially cushion falling demand. There are already factory closures due to declining exports, which further complicates the situation. Added to this, is the ever-increasing cost of China’s zero-Covid policy. The recent lockdowns in Shanghai and Chengdu have left their mark on the economy. China’s economy grew by just 0.4 per cent in the second quarter of 2022 compared to the same period last year. This puts the politically stipulated growth target of 5.5 per cent a long way off.

It is also becoming clear that the country is not prepared for the omicron variant and its own vaccines cannot compete with those of the West. The brutal enforcement of the quarantine rules has revealed a political dimension to the Covid strategy that China has pursued so far. Indeed, President Xi expressly reaffirmed this strategy at the 20th Communist Party Congress. The population is reacting with increasing incomprehension and contradiction to the government’s seemingly senseless harshness. Looking at the Covid years, together with the economic problems outlined above, it seems that for the first time in decades popular trust in the leadership has been eroded. The Chinese development pact between the people and the leadership states that ‘we (the government/party) ensure continuous increase in prosperity; in return, you (the people) renounce political participation and a say’ – but this pact is apparently losing its shine and its identity-assuring power. The first Western economists suspect that China may be moving towards a ‘Japanisation’ of its economy  (an allusion to Japan’s two lost decades characterised by low growth and deflation), or that it will find itself in a ‘middle-income trap’ in the foreseeable future.

Against this backdrop, it is clear that the Russian war against Ukraine comes at a bad time for China. The country already has enough to do with its own problems. Unlike Russia, it is not in China’s interest to destroy the existing international order. China’s contradictory attitude to the Ukraine war (verbally supporting Russia in everything that harms the West, but at the same time respecting Western sanctions and not supporting Russia militarily) is becoming increasingly difficult to convey internationally. It is eroding China’s image. Vladimir Putin felt this when he met Xi Jinping at the SCO (Shanghai Cooperation Organisation) summit in Samarkand in September, when Xi Jinping gave his ‘best friend’ a good reprimand regarding responsible great power behaviour and the framework conditions of globalisation: he is “willing to work with Russia to demonstrate the responsibility of big powers”, but this must be pursued “to instil stability and positive energy in a world of chaos”. And Beijing has now also clearly rejected Russian threats to use nuclear weapons – shown first during the visit of the German Chancellor, Olaf Scholz, to Beijing and again during the G20 summit in Bali.

Responding to headwinds in a chaotic world

This complex mixture formed the background for the 20th Chinese Communist Party Congress, where it became clear how the party intends to meet the multiple challenges. The focus was initially on President Xi Jinping’s increase in power, documented by the unprecedented third term he was granted. At the same time, market-oriented technocrats were replaced by Xi loyalists in the party leadership. In public discourse, Deng Xiaoping’s motto of ‘let some get rich first’ has been replaced by Xi Jinping’s motto of ‘common prosperity’. The rampant corruption is being fought more vigorously, and China’s billionaires are temporarily disappearing and/or being ‘brought into line’ – in the very tradition of communist self-criticism. In summary, since Xi took office in 2012, the Middle Kingdom has experienced tendencies towards re-centralisation, re-politicisation, re-ideologisation and increased repression. The new party leadership symbolises the renunciation of collective leadership elements and the party is again becoming the transmission belt for the economy and the society. 

The new leadership does not question its own policy. What is visible instead is the shift towards a dominance of political over economic rationality. This comes even though domestic and foreign observers of China’s successful trajectory over the past four decades agree that decentralisation, the delegation of economic decisions, competition and creativity in the economy, and a certain internal pluralism in politics and unwritten rules for governance (like the limitation in terms of office of decision makers) have been constitutive elements in China’s rapid rise.

With Xi’s China, an old question of the development policy debate seems to be returning to the political arena: can an autocratically run economy and society outperform free-market democracies in terms of innovation and growth? Against the backdrop of its integration into the international institutions, its economic power, the technological level it has reached, its growing military strength and the monitoring of its citizens made possible by the social credit system, China seems to be answering this question with a yes.

With the People’s Republic, an actor has emerged in global politics that propagates its own path of development and clearly distinguishes itself from Western ideas of the universality of human rights, democracy as the best possible form of governance, or a constructive role for civil society organisations in a functioning community. China’s extremely successful catch-up development model has cleared away one of the dogmas of the development debate: modernisation is not to be equated with Westernisation – it can also be achieved in other ways. From a Western perspective, however, it remains to be seen if a re-centralised, re-politicised and re-ideologised decision-making process can be sufficiently efficient to compete in the global economy. 

In this regard, the final staging of the 20th CCP congress provided symbolic indications regarding the party’s understanding of leadership under Xi: six men over 60 applauded a single leader. The ‘other half of heaven’ (Mao Zedong) remains invisible. We will see how attractive and efficient this governance model turns out to be in the globally connected world of the 21st century.

Photo credits: Shutterstock/Alessia Pierdomenico

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