China is at a crossroads. The spectacular growth of its economy, which has propelled the People’s Republic to superpower status and buoyed global growth, is slowing significantly. As well as anti-China measures taken by the United States and its allies, pressures are rising at home even as the leadership in Beijing proclaims that it holds the keys to the future in a re-ordered, Sinocentric world. This has an importance that stretches beyond the quarterly GDP figures or the falling producer price index – or even the drive to make the country the world’s leading technological power, despite notable success in sectors including electrical vehicles and artificial intelligence. China’s present problems face the country’s supreme leader, Xi Jinping, with a series of policy choices that go to the core of the regime, and the foundations of the power exercised by the monopoly Communist Party (CCP).

The market-minded economic model presided over by Deng Xiaoping in the late 1970s after the death of Mao Zedong was, beneath its immediate economic effects, a political project aimed at making China Great Again and giving the CCP, which Deng had served since the 1920s, a new legitimacy as the deliverer of greater prosperity and national well-being. In place of Mao’s collectivism, individuals were to be made free to get rich. It was an offer to which they responded en masse. Instead of the isolation and autarky of the Mao era, markets were sought abroad, and foreign assistance was accepted to fuel China’s revival as Western and Japanese companies lined up to get a slice of the new business frontier, and the world lapped up low-cost Chinese goods. The combined global impact made the reform and opening up programme the most important global event since the end of the Cold War. Mao had changed China; Deng changed the world.

There were, however, limits to the degree of liberalisation Deng and his successors envisaged. Foreign investors were welcomed – so long as they contributed to China’s growth and technological advancement, and agreed to form joint ventures. Maintaining the CCP’s supremacy was always the essential priority. No questioning of the pillars of the regime was permitted. Despite some delegation of top-level policy implementation to ministers, especially during the 1998-2003 premiership of the take-no-prisoners moderniser Zhu Rongji, the government remained subordinate to the Party in terms of authority. In the capital and the provinces, Party officials took precedence over administrative officials.

As became evident with the brutal suppression of the protests of 1989 in Beijing and other cities, the Deng programme of ‘reform and opening up’ had strict limits; while people could get rich by their own efforts, they had to leave politics to the Party in a bargain well understood in a nation that had never known competitive democracy and had been ruled in its glory days by autocrats claiming to be semi-divine and to possess the Mandate of Heaven. Western forecasts that, as the Chinese grew richer, they would press for the ruling system to liberalise and thus become ‘more like us’ were either naïve make-believe or a smokescreen for corporate ambitions. The newly-emerging middle class, which some foreign observers saw as the motor of change, counted its blessings from the new state of the nation and became a bulwark of the regime, which continued to exercise the traditional system of rule by law, rather than rule of law, from which the Party remained immune.

Despite the rise of Chinese private businesses, the state sector remained omnipresent and well protected by its political masters in Beijing. While private leasehold of real estate was introduced in the 1990s and set off a boom that made real estate a major contributor to growth, the basic ownership of all land continued to be in the hands of the state or collectives, and local authorities made the most of their title deeds to boost the property boom.

Deng’s successors – the wily Jiang Zemin, and then the less forceful Hu Jintao – continued the system he had set in place, complete with limited liberalising of society and encouragement of private enterprise, which provided the main stimulus for growth. Their eras saw China becoming the manufacturing workshop of the world, with assembly lines for both domestic and foreign enterprises staffed by millions of migrant workers from the countryside, the debt-driven growth of major companies, including e-commerce giants such as Alibaba, and the sprawling expansion of property behemoths along with a huge misallocation of capital, exorbitant spending by local authorities, the development of serious excess capacity in numerous sectors – and the accumulation of fortunes that made the nation’s big cities a goldmine for purveyors of luxury goods.

With China expanding to become the world’s second biggest economy and the combination of growth and repression providing a political and social safety net, the leadership saw no reason to change course. A lot of people in positions of power were doing too well materially to envisage any alterations to the system. Still, some analysts quibbled with the official growth numbers, warned of the growing debt mountain, and pointed to the country’s dependence on infrastructure spending, inefficient use of capital, and low level of consumption. In a telling interjection in 2007, the Prime Minister, Wen Jiabao, warned that the economic trajectory was ‘unstable, unbalanced, uncoordinated and unsustainable’. But he then promoted a massive infrastructure-led stimulus package in response to the world financial downturn of 2008, which turbo-charged China’s growth, but only exacerbated the instability and imbalances of which he had warned. As high-speed trains powered their way across the country, airports bloomed in out-of-the-way regions and city centres put the West to shame in trappings of modernity, the Communist Party earned what became known as ‘performance legitimacy’, bolstering the trust of the nation as it delivered material gains in place of political and social freedoms.

But, on taking the country’s top job as General Secretary of the CCP at the end of 2012 (followed by the State Presidency and the Chair of the Central Military Commission), Xi Jinping made plain that he felt the political system had allowed itself to be weakened internally under his predecessors. His overwhelming priority was to increase the Party’s grip and to strengthen the CCP. Politics in its most brutal form took precedence over economics as the new chieftain asserted himself, reinforcing China’s age-old authoritarian system on the way to making himself the new emperor.

The son of an historic Communist leader who had been purged by Mao and then re-instated in powerful positions by Deng, Xi saw the CCP and the nation as having been sapped by corruption, factionalism and rent-seeking by officials, as the ‘shopkeepers’ like Hu Jintao presumed to take over the place that rightfully belonged to ‘princelings’ such as himself. Strong leadership by the only permitted leading force – the Communist Party – was needed to assert his own supremacy and to achieve the ‘China Dream’ of national rejuvenation, with a top-down stress on national security, military modernisation, internal surveillance – and the pledge to unite Taiwan with the mainland, by force if necessary. Some foreign observers saw Xi as a potential reformer; they were wrong, and were soon disabused. He was a hard-line power player who became a model for dictators round the world, and won praise from Donald Trump as a ‘smart, brilliant’ ruler who ‘runs 1.4 billion people with an iron fist’.

Real or potential foes were ruthlessly defenestrated in a huge, rolling purge, launched in the name of the fight against corruption. This brought down high-ranking CCP figures as well as legions of lower-level Party members in central or local government. Political power centres were dismantled or sidelined. Private business was to be tolerated only so long as it followed the Party’s dictates. The Politburo was filled with loyal Xi lieutenants and factions sidelined or eliminated as the new emperor built up his status as ‘core leader’ and overturned term limits on his office. Far from being a short-lived exercise in power, his purge has continued to this day, spreading, most recently, to top commanders in the armed forces. Despite this accretion of personal power, accomplished to an extent that hasn’t been seen since Mao Zedong, Xi has kept on waving the flag of struggle, resilience, and loyalty to national destiny while repeatedly warning of foreign plots to undermine China and its leadership. The comparison with Stalin is evident.

Control was the watchword, and, for Xi and his acolytes in the Politburo, control knows no limits. Instead of banking on the money-making freedom of individuals to revive China and support the CCP, as Deng had, the leadership moved back to promoting the collective state in which belonging to an increasingly powerful nation was reason enough to require loyalty. A document circulated in the Party in 2013 outlawed seven ‘Western values’, including constitutional democracy, universal values, legal independence and media freedom, as being aimed at undermining Chinese society and its ruling party’s authority. Deng’s limited delegation of authority was reversed by taking decision-making powers over such matters as economic policy from the government into the Politburo, and increasing the role of the Party-State. The high degree of autonomy promised to Hong Kong by the Joint Declaration signed by China and Britain in 1984 was overturned by draconian national security regulations imposed by Beijing.

At the same time, Xi sought to supplant those sectors of society or the economy that threatened to escape the rigid control of the Party-State, be they tycoons like Jack Ma of Alibaba, who had prospered under the less statist system of Xi’s predecessors, domestic finance houses, or the Uyghurs of Xinjiang. Any questioning of the official version of China’s past was denounced as ‘historical nihilism’, which was blamed for the collapse of the Soviet Union. The freedom of public service employees to travel abroad has been restricted by requiring them to hand in their passport. Censorship was ramped up as transparency – for instance over economic data – was restricted in the name of national security. Images of Winnie the Pooh were banned after an Internet meme had compared the full-bellied bear to the somewhat rotund Xi Jinping, while a book on the ill-fated last emperor of the Ming dynasty was withdrawn from sale after online postings had drawn parallels between him and the general secretary.

Continuing economic growth in the first years of his rule gave Xi and his focus on politics and Party room to breathe as he enforced his top-down paradigm for the nation, summed up by an expert on Xi Jinping Thought as ‘One China, One Ideology, One Party, One People, One Leader’. The rate of expansion might have fallen from the turbo-charged years of his predecessors, but the economy, as a whole, was much bigger and so the degree of wealth creation helped to sustain the regime, even if domestic consumption remained low by the standards of a country China’s size, making expansion too dependent on investment and exports. Downturns in the growth trajectory were met with stimulus packages that poured more money into industry and construction.

The trade tariffs of Trump’s first term were shrugged off or evaded, while Western businesses remained keen to expand their presence on the mainland, be it in finance, cars or chemicals. To establish China as a major force in the cyber-world, Xi launched a well-funded drive to develop a high technology industry that would free it from the threat of US sanctions. In pursuit of this ambition, he preached the doctrine of ‘self-reliance’ to reduce China’s dependence on foreign suppliers, backed by a ‘whole-nation approach’ to rally the country’s resources behind what he repeatedly describes as the most challenging global environment the People’s Republic has faced. He also counted on the Party-State to deliver ‘made in China’ technological progress as ‘new quality productive forces’ ushered in a new phase for the nation and ensured that it out-paces the United States with innovations such as the recent DeepSeek artificial intelligence breakthrough.

There were some warning voices from within the system even as it became more and more hermetically sealed and dependent on the recurrent stimulus packages and exports to maintain expansion. In 2016, an anonymous ‘authoritative figure’ (presumably a highly-placed official) warned in an article published in the Party’s main newspaper, People’s Daily, that the People’s Republic faced an ‘L-shaped trend’, meaning that, after declining (in the form of the vertical stroke of the letter), growth would be very slow to recover, mimicking the horizontal part of the L. But growth still motored along at over six per cent. Excess capacity continued to expand, generating unhealthy cut-throat competition among producers, and exports rose, accounting for 20 per cent of GDP in 2020.

Then Covid struck, bringing a deceleration beyond any control mechanism the Politburo could conjure up. Annual growth fell to 2.24 per cent in 2020. The draconian clampdown against the pandemic was widely accepted by the population to begin with as a necessary measure, but then it became widely resented and undermined the regime’s claim to be acting in the interests of its citizens at large. The pandemic buttressed the control Xi prized so highly, but ended by threatening to arouse popular resistance – not to mention the economic cost. However, since the leadership abruptly switched course with the lifting of the lockdown at the end of 2022, deflationary pressures have continued, leading to the present challenges facing the last major state ruled by a Communist Party.

The problems Xi faces run too deep to be ignored. Their very depth means that dealing with them would force him to confront the political challenge inherent in structural change for a regime that has always founded its policies on one basic consideration – the preservation of CCP rule.

The public mood is morose as the fault lines inherent in the economic policies of the previous decade come home to roost. Trust in the regime’s ability to deliver the ‘China Dream’ has declined, threatening its legitimacy. The leadership is more removed than ever from ordinary citizens; the prime minister, who used to act as a rod connecting the Party with the people, no longer does so. Talk at the top about pursuing ‘common prosperity’ to spread the benefits of wealth more evenly has receded while the nationalist-military flag is waved repeatedly. The crash of over-extended property developers has had ripple effects through supplier industries, from steel to furniture, and hit millions of households that put their money into real estate in the expectation of ever-rising values and in the absence of other investment vehicles. Local governments that had cashed in on a real estate boom were left exposed when projects stalled or turned into financial disasters.

The promise of high-tech progress central to Xi Jinping’s message is a source of national pride, but this may not outweigh everyday concerns for many households as it does little to boost the pay packets or living conditions of those outside the IT sphere. In 2021, the term ‘lying flat’ was coined to describe young people who rejected the need for hard work and the ‘996’ working pattern – shifts from 9am to 9pm, six days a week; the trend was large enough to provoke a warning against it from Xi Jinping in an article in a Party journal.

The falling birth rate and increase in life expectancy have punched a big hole in China’s ‘demographic dividend’. The natural population growth rate has fallen steadily, despite official efforts to encourage births: a long-term decline in fertility, urbanisation and the cost of having children are among the factors. Chinese society continues to be highly unequal. Extreme poverty has fallen sharply – Xi declares that 100 million people have been lifted out of that state on his watch – but the rural-urban wealth divide remains wide. In 2020, the then Prime Minister, Li Keqiang, said that 600 million people were still living on monthly incomes at or below 1,000 yuan ($154).

Stimulus packages bring diminishing returns now that the low-hanging fruit has already been gathered by previous pump-priming. Consumption remains minimal for an economy of China’s size, at around 53 per cent of GDP – ten points below the 63-64 per cent of GDP that independent economists believe it needs as a bare minimum for sustainability. The traditional penchant for putting money aside as a precaution for bad times, a natural enough reflex after China’s tumultuous history of the past two centuries, has been perpetuated for decades by inadequate welfare provisions that boost the need of many people to save to pay for health care, education and retirement, particularly for the 250 million or so migrant workers who are not covered by the sparse general protection that does exist. This savings habit was heightened by the impact of Covid and the impoverishment caused by the property crash: total savings are now put at $20 trillion. Small businesses at the bottom of the supply chain are growing more risk averse. Restaurants report declining business and some European suppliers of luxury goods are reviewing the dependence they have built up on sales to those with money to spare in China’s big cities.

Though the country is in no mood to increase discretionary spending and productivity has fallen, manufacturers keep ramping up production in keeping with the Deng formula and Xi’s supply side beliefs; China now produces as much steel as the rest of the world put together. The resulting excess capacity makes it increasingly dependent on exports at a time when major markets are growing leery of the People’s Republic and levying trade sanctions. Even if the second Trump administration did not immediately implement the 60 per cent levies mentioned by the president on the campaign trail, Trump has recently announced that 20 per cent tariffs will be imposed on all Chinese imports to the US from 4 March, doubling those that were put in place in February.

Though some companies are doing well, particularly if they have aligned with the Big State message, corporate profits are under strain, and the producer price index is down 2.8 per cent on the past year. The property crash following the collapse of the heavily-indebted Evergrande empire has left real estate space worth an estimated $400 billion unoccupied, hitting suppliers of steel and concrete, furniture and white goods makers, not to mention foreign commodity producers, as well as property-investing households, local authority finances and construction jobs.

Unemployment has been rising steadily, and would be even higher if excess capacity was eliminated; the jobless increase was so steep among young workers that the authorities stopped publishing data for a time, and then came up with a figure of 21 per cent. The finances of some local governments are so bereft that in 2024 a dozen provinces were ordered by Beijing to cancel infrastructure projects, and there were reports of employees in some areas simply not being paid.

Even the bright spots have their darker lining. Some sectors where China leads the world, such as electric vehicles and solar power equipment, suffer from excess capacity, leading the Politburo to inveigh against what it calls ‘vicious involutionary competition’. The steel industry may dominate world production but domestic prices have fallen by 16 per cent in a year and barely any mills are profitable. While exports have held up well, they are running into increased tariff walls in western economies and often, as with steel and electric vehicles, reflect the imbalance between the volume of production in China and the soggy state of domestic demand, leaving manufacturers reliant on foreign sales to try to balance their books.

Meanwhile, increasing restrictions enforced in the name of national security by the Party State are hitting foreign companies and the flow of finance into China, with the European Union Chamber of Commerce warning last September that a ‘tipping point’ had been reached in which ‘maybe other markets are becoming more competitive, more attractive’ and some Chinese manufacturers are off-shoring in a bid to escape US and European tariffs.

The 2024 growth target of five per cent was duly hit after an improvement in the last quarter of the year, according to the official announcement (though independent analysts believe the true figure is considerably lower). But corporate profits fell by three per cent over the year, and 2025 began with a contraction of manufacturing activity in January, according to official data.

Even if the leaders cry triumph in their long march to surpass the West, it is apparent that China needs a new economic model. The choice before Xi Jinping is simple, but devilishly difficult; he can try to continue the old model by launching a series of stimulus packages that will pump up the economy, infrastructure and property – for a while, at least. This would be a major undertaking, straining state finances. A group of foreign investment bank economists estimated in October that an injection of $1.4 trillion would be needed to combat deflation to start with, while local government debt has risen to 80 per cent of GDP. Alternatively, Xi can accept that China’s problems are structural and will not be solved by short-term cyclical measures, and start putting right the deep and broad flaws left by the growth explosion. While that would be the right way to go, it runs the double political risk of upsetting the ruling system and discomforting important sectors of society, which have benefitted from the expansion launched by Deng half-a-century ago.

Uncertainty over which policy route to adopt seemed evident in the autumn of 2024 after the stock market reflected deteriorating conditions by registering a continuing three-year decline. Early in October, the authorities first made known, in broad terms, that a stimulus package was coming, with measures to help local governments, put money into the pockets of people on low incomes, support the property market and boost the capital of banks. This sent the depressed stock market spiraling upwards in the hope of a ‘big bazooka’ to revive the economy. But, when the details of the measures came a few days later, there was less meat than anticipated as if, knowing the problems that had piled up from previous ‘bazookas’, planners were reluctant to add significantly to the debt burden to pay for increased structural change, including better social protection and a meaningful bail out of the real estate sector.

As disappointment set in, markets fell back, with the growing danger of a loss of public confidence in whether the regime knew the best course forward. Finally, meeting in early 2025, the Party’s top body, the Politburo, acknowledged the need for ‘more active’ policies with a ‘moderately loose’ monetary approach, using language not deployed since the global financial crisis 16 years earlier. But there was still no sign of the necessary structural changes to set China on a new, more solid course.

Ensconced amid the lakes and lawns of the walled-in leadership estate beside the Forbidden City in Beijing, or meeting foreign leaders on carefully orchestrated occasions, Xi Jinping presents a confident, unruffled appearance behind the screen of national security he has erected, free from opposition and such troublesome restrictions as term limits on his presidency. Well on his way to fulfilling the role of an absolute ruler from a previous age, he has made himself China’s latest emperor at the head of a dynasty that claims its own Marxist-Leninist-Stalinist Mandate of Heaven and whose mandarins are united in reciting the liturgy of Xi Jinping Thought as the key to making the People’s Republic the centre of a new world order as the East rises inexorably and the West declines.

However, the imperial parallels contain an uncomfortable note; it was when emperors became isolated and failed to deliver material improvements that they were at their weakest. From the start, the CCP has made sure that there is no organised opposition waiting for its demise. But, having completed his political ascent on the back of the Deng-era economic reforms, Xi now faces a moment of truth as far as society and the economy are concerned, with major implications for the political system he dominates. The issues the country confronts run well beyond the cyclical responses used since 2008 in the form of stimulus packages and financial re-wiring. They require structural changes that, inevitably, will affect the framework on which the Communist Party has based its power, and risk alienating many of those who have profited from the status quo. But, one is tempted to ask, what is the point of Xi’s accretion of power if it is not to shake up the system he inherited?