China: Year in Review 2023

Former Chinese premier Wen Jiabao once remarked: “Any small problem multiplied by 1.3 billion will end up being a very big problem, and a very big aggregate divided by 1.3 billion will come to a very tiny figure.” This observation aptly describes the outcome of China’s response to COVID-19.  Boasting its lowest Covid fatality rate, Chinese leaders acclaimed their COVID response as a “major decisive victory” and a “miracle in human history.” However, following the abandonment of the zero-COVID policy, the Omicron tsunami led to over a billion infections and more deaths in two months than the United States witnessed in more than three years. Minxin Pei comments that the surge in COVID deaths represents “the most lethal event in peacetime China since the 1959-61 famine that followed the Great Leap Forward.”

Interestingly, once the COVID-19 viral wave subsided in February, Chinese media barely mentioned the pandemic, as if it has never occurred. Yet, the pandemic’s shadow lingers. This is not only due to the continued spread of COVID-19 in China but also because of an immunity gap between COVID and other background infectious diseases. Starting in May, China saw a spike of respiratory illnesses caused by multiple pathogens, including influenza, respiratory syncytial virus (RSV), and mycoplasma pneumonia. The World Health Organization, concerned about undiagnosed pneumonia clusters in children in northern China, publicly requested more information from the country. Recent reports of reintroduced health codes and mandatory PCR tests in hospitals have rekindled fears of a return to the zero-COVID regime.

COVID-19 has also cast a long shadow over China’s economy. Scrapping zero COVID raised hopes of a rapid economic rebound. The economy started strong in the first quarter, but soon showed signs of faltering, evidenced by the persistently weak domestic demand (which leads to the increased deflationary pressure), a real estate sector meltdown (highlighted by the arrest of the billionaire tycoon of property giant Evergrande), collapsing foreign direct investment, decline in international trade, and the unprecedentedly high youth unemployment rate. The lackluster economy raised questions about whether China has peaked. To bolster the economy, China issued 1 trillion yuan ($137 billion) in sovereign bonds and allowed local governments to use part of their 2024 bond quota in advance. In November, the International Monetary Fund (IMF) upgraded China’s 2023 GDP growth forecast from 5 percent to 5.4 percent. 

The COVID fiasco has also made the country harder to govern. Plagued by overspending on zero-COVID, colossal “hidden debts”, and dwindling revenues, cash-strapped local governments struggle to provide public goods and services. In February, hundreds of retired workers in Wuhan and Dalian protested government cuts to their personal medical benefit allowance.  Driven in part by rising premiums and co-payments, China’s state-subsidized health insurance schemes lost 17 million subscribers in 2023. These challenges did not disrupt the power transition in China, though. In March, Xi Jinping secured a third five-year term as China’s president and cemented influence by appointing allies and protégés to key positions in the State Council, including Premier Li Qiang, Foreign Minister Qin Gang, and Defense Minister Li Shangfu. Both Qin Gang and Li Shangfu were later sacked after vanishing from public life for months. The unexplained purge of two Xi royalists, along with the mysterious disappearance of top rocket force commanders, signaled potential regime instability. There are also indications that the once admired Chinese model is losing its allure. China is expected to see the world’s biggest millionaire exodus this year, while the number of Chinese nationals apprehended crossing the U.S.-Mexico border into the United States is more than in the previous ten years combined. 

On the foreign policy front, China’s economic slowdown has not hindered its global ambitions.  In June, China brokered a peace deal between Saudi Arab and Iran. It also positions itself as a mediator in the Russia-Ukraine and Israel-Hamas conflicts. Its influence remains strong in lower and middle-income countries. The third Belt and Road Forum drew more than twenty heads of state and government, mostly from developing markets. However, Beijing suffered a clear setback in projecting soft power in the developed world. The U.S.-China rivalry, intensified during the pandemic, continued through 2023. The formation of the House Select Committee on China in January and the entry of a Chinese surveillance balloon in U.S. airspace in February further strained relations. Negative perceptions of China in the United States reached new highs, with 83 percent of adults holding unfavorable views of the country. Partly due to the worsening U.S.-China relationship, American students studying in Chinese universities dropped to the lowest level in decades, and the weekly number of round-trip flights allowed to operate between the two countries is only about 20 percent of the pre-pandemic level. In October, the Biden administration escalated its chip war with new restrictions on advanced computer chips.

There is a silver lining in the cloud: following the balloon incident, the Biden administration shifted focus to maintaining strategic communication and de-risking with China. Since U.S. Secretary of State Blinken’s visit to China in June, a series of high-level exchanges have been restarted, culminating in the Biden-Xi meeting in San Francisco in November. These exchanges have injected positive dynamics into the bilateral relationship, resulting in agreements to operationalize working group mechanisms for economic and financial matters, countering narcotics, enhancing climate action, and addressing regional and maritime issues.

Looking ahead to 2024, China faces numerous challenges and uncertainties. The Central Economic Work Conference urged “promoting a positive view of China’s economy,” but both the IMF and the World Bank project slower economic growth in 2024. This less-than-rosy economic outlook looms large for Chinese leaders, especially in the lead-up to the 75^th anniversary of the founding of the People’s Republic in October – a milestone meant for celebration, not concern. The future performance of China’s economy hinges critically on its policy space, now seemingly hemmed in by its rigid political system. Moreover, external developments like the 2024 Taiwan and U.S. presidential elections will shape the trajectory of cross-strait and U.S.-China relations, as well as China’s internal transition. As the clock ticks towards 2024, the interplay of internal politics and external pressures could either generate new policy space for China or further tighten the existing binds, setting the stage for a defining year in its history.