The great competition between the US and China—which only intensified in 2022—will likely be the most important theme of the coming decades, longtime global economy watcher Stephen Jen has rightly said.

With that in mind, we look-ahead to 2023 by focusing on three important dynamics underlying the rivalry. Two relate to where the rest of the world positions itself on the field, and the third analyzes where China itself is heading after a year of weak economic growth.

Europe’s position is perhaps the fulcrum of the competition next year. Xi Jinping’s relationship with Vladimir Putin placed a significant strain on China’s ties with Europe after Russia’s invasion of Ukraine. But by year-end, Germany’s chancellor visited Beijing, and France’s president is expected there soon. The European Union has in some ways tightened ties with the US as they united against Kremlin aggression, but tensions between the two have also flared.

With India leading the Group of 20 in the coming year, Washington may discover whether its dream of reducing China’s role in global supply chains via friend-shoring is realistic. And, ultimately, how successful China is in reviving economic growth, especially given the health catastrophe triggered by Xi’s abrupt end of “Covid-zero,” will be a decisive factor in its rivalry with the US, as well as shaping the views of the rest of the world.

Europe as fulcrum

Beijing’s longstanding desire for Europe is that it hew to a line of “strategic autonomy” and not ally with the US in a way that would damage China’s vital economic interests. The EU is roughly equal to the US as far as its export market is concerned, and a big source of investment in China.

Europe has often lived up to that hope. Chancellor Olaf Scholz’s recent visit (along with an entourage of German business leaders) highlighted how the biggest European economy isn’t embracing any broad economic decoupling. Italian Prime Minister Giorgia Meloni even told Xi in November that she wants deeper trade ties with China.

Xi has also sought to address European angst over China’s friendship with Russia, a Beijing ally that has spent the past 10 months killing tens of thousands of Ukrainians while destroying the country’s infrastructure. Xi told Scholz he opposes the use of nuclear force in Europe (a prospect repeatedly mentioned by Putin and his adjutants) and recently said he wants to see talks to end the war.

But 2022 wasn’t all good news for China when it comes to the EU. European leaders said they share US concerns about its human-rights record, including the forced detention of a million Muslim Uyghurs in Xinjiang. And in the economic field, there are increasing EU worries about a surge in imports of Chinese-made vehicles. Some 11% of the electric vehicles sold in Europe during the first three quarters of 2022 came from Chinese automakers—up from just 2% in 2020.

As this newsletter has reported, the EU also has enhanced its economic cooperation with the US through a new forum, the Trade and Technology Council. How effective that is in addressing trans-Atlantic tensions and coordinating approaches toward China will be important to monitor.

Finally, there is division within Europe over the attractiveness of Chinese investment. Germany’s cabinet was split over a Chinese state-owned shipping conglomerate’s bid for a stake in a Hamburg container terminal. There was however no such open disagreement over sales of two chip facilities, which Berlin blocked in November.

Emerging Markets

In the original Cold War, a broad swath of developing nations refused to line up behind either Washington or Moscow, beginning the Non-Aligned Movement. Indonesia and India were two key members, and their NAM heritage remains apparent today.

Serving as the 2022 rotating head of the G-20 grouping of big advanced and emerging markets, Indonesia welcomed Russia’s participation at the Bali summit even in the face of Washington’s opposition. India—which takes up the G-20 chairmanship for 2023—also declined to join the West in isolating Russia for starting the largest land war in Europe since World War II.

The US has placed high hopes on nurturing India as a “friend-shoring” replacement for at least some Chinese production. For example, signs are emerging that Apple Inc. is eyeing India, along with Vietnam, as a new major manufacturing hub.

As India Prime Minister Narendra Modi and members of his cabinet host their counterparts from around the world, the coming year ought to provide greater clarity on where India sees its future, and whether New Delhi is really ready to embrace closer links with Washington.

And late in 2022, the White House’s planned pivot toward Africa in the face of Chinese and Russian inroads there yielded movement, with $15 billion in deals coming out of President Joe Biden’s first summit with African leaders in eight years.

Biden, along with his Treasury, Commerce and Defense secretaries, is planning to visit African nations in 2023. After China’s long run of dominance in development lending and investment on the continent, the new year may show if the US is in for the long haul.

China’s Reopening

The biggest source of Beijing’s sway with others is, of course, the giant size of the Chinese economy. Rapid growth propelled revenues that allowed China to send billions of dollars worth of investment into emerging nations, fund a massive military buildup and acquire countless assets overseas, from seed-product giant Syngenta Group and robotics maven Kuka to a network of ports spanning the globe.

But China’s economy stumbled in 2022, hewing to Xi’s “Covid-zero” policy while the rest of the world opened up. Domestic retail sales shrank over the 12 months to November. Industrial output was up a paltry 2.2%. The property market has been hammered by a deleveraging push. And underlying population and productivity trends are unpromising.

The Tokyo-based Japan Center for Economic Research in December revamped its medium-term economic projections to declare China is unlikely to surpass the size of the US economy in coming decades, as had been widely predicted.

If China’s trading partners around the world come to a similar conclusion, that could have a powerful impact on how willing some developed nations will be to set other concerns aside and embrace deeper relations with Beijing.

Now with an iron grip on the Communist Party following his third term-coronation this fall, Xi recently turned to the old Politburo playbook: goosing the economy with infrastructure projects. He also pledged fresh assistance for real-estate financing and re-embraced the quantitative targeting of growth.

It’s clear that 2023 won’t be a repeat of 2022—but for Xi, there’s no guarantee it won’t be worse. The biggest reason is his sudden move this month to dismantle “Covid-zero” following nationwide protests. While the lifting of restrictions was arguably aimed at facilitating an economic recovery, it triggered the biggest Covid infection wave of the pandemic—one that in a worst-case scenario could kill millions of Chinese and potentially imperil the rest of the world with new variants.

How the wave plays out, both in terms of fatalities and economic impact, as well as any residual social tensions from demonstrations, may impact not only how Xi unveils his new government in March, but the broader fate of China in the coming year.

Source: Bloomberg

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