China becomes softer under economic depression: Examining the relationship between the Chinese economy and diplomacy

1． Correlations between China’s diplomatic stance toward the U.S. and its economic situation: assumptions of comparison

There are two views about the correlation between China’s diplomatic stance and its economic situation.

One view is that when its economy is in the depression, China takes a harder-line stance toward foreign countries in an effort to deflect the dissatisfaction of people with domestic affairs.

The other is that when its economy is in the depression, China rather takes a softer attitude toward foreign countries in order to avoid the risk of having negative effects on its economy.

In order to confirm this point, the author graphically represented changes in the purchasing manager’s index (PMI) in the manufacturing industry, a typical indicator that shows business sentiment in the domestic economy. (See the below figure.)

There are two PMI categories -- manufacturing and non-manufacturing -- but the manufacturing industry’s PMI with a high percentage of private enterprises was chosen from the viewpoint of selecting an indicator in which business sentiment is easily reflected.

Changes in the purchasing manager’s index (PMI) in the manufacturing industry

The PMI is obtained by conducting a questionnaire survey of corporate purchasing managers, asking about business sentiment, and if the index exceeds 50, it indicates that many of the managers feel that the economy is expanding, and if it is below 50, it shows that many of them feel that the economy is slowing down.

Basically, Sino-American relations were favorable from the 1990s to around 2010, and, in 2001, backed by the U.S., China joined the World Trade Organization (WTO), which was the main cause of the subsequent export-led rapid development of the Chinese economy.

After the bankruptcy of Lehman Brothers in the autumn of 2008, however, the world economy avoided being plunged into a great depression thanks to the extensive measures the Chinese government took to stimulate domestic demand. This led China to deepen its confidence in its national power, and partly pushed by the rise in nationalism within the country, China shifted from the previous modest stance to hard-line stance toward foreign countries.

The U.S. expected, on the other hand, that China’s admission to WTO would lead China to make progress in steadily liberalizing its economy and shifting to a market economy, but China failed to live up to America’s expectations for the pace of change in trade, investment, finance, etc.

For the major reasons specified above, Sino-American relations worsened early in the 2010s.

2． Correlations as seen from specific events

A comparison of business sentiment in the Chinese economy and China’s external policy in the 2010s and thereafter based on the understanding described above reveals the following facts:

PMI-manufacturing continuously fell below 50 (deteriorating business sentiment) during four periods: January 2015 to June 2016, November 2018 to February 2020, September 2021 to the end of 2022, and April 2023 to the present day.

A look at typical events that indicated China’s hard-line stance toward the U.S. shows that they included the setting of an air defense identification zone (ADIZ) over the Taiwan Strait in November 2013; the announcement at the 19^th National People’s Congress of the Communist Party of China in October 2017 of the vision in which China aimed to become the world’s leading military power by the middle of the 21^st century; and the development of wolf warrior diplomacy centered on tough remarks by a spokesperson of the Ministry of Foreign Affairs against the U.S. during the period from February 2020 to the end of 2022.

These events generally occurred as the Chinese economy expanded.

The wolf warrior diplomacy continued in 2022 when business sentiment worsened in China.

During this period, as its mid-term elections in November 2022 approached, the U.S. took an increasingly stiff attitude toward China as the latter was faced with human rights problems in the Xinjiang Uygur Autonomous Region and adopted a pro-Russian stance after the Russian invasion of Ukraine.

In addition, in August, Ms. Nancy Pelosi, the then Speaker of the House of Representatives, visited Taiwan, and as typified by this and other events, the U.S. assumed a firm attitude toward China. In response to these events, the Chinese government developed wolf warrior diplomacy by criticizing the U.S. repeatedly.

Specifically, China did not strongly criticize Russia after the invasion of Ukraine and continued to censure America’s net that encircled Russia and China based on its Cold War way of thinking.

China also harshly criticized the then House Speaker Pelosi’s visit to Taiwan in August 2022, saying that the U.S. government disregarded the One China policy.

Not a few China experts in the U.S. were of the opinion that Sino-American relations deteriorated largely because of the actions taken by the U.S.

Based on this opinion, China probably had no intention of actively adopting a hard-line stance toward the U.S. but was somewhat forced to respond to America’s firm stance.

There was, on the other hand, one example of typical events that showed China’s conciliatory stance: since conflicts continued between the U.S. and China, including strong trade and technological friction and the downing of the balloon, China finally accepted America’s request for a Sino-American summit despite it having been predicted as unlikely to do so.

Other examples were found on two occasions: when the G20 summit was held in Osaka in June 2019 and when the Asia-Pacific Economic Cooperation (APEC) summit took place in San Francisco in November 2023. These events all occurred when China’s economic slowdown was conspicuous.

In addition, a look at macroeconomic indicators in recent months suggests that while many major economic indicators have continued to recover since August 2023, PMI-manufacturing, which shows business sentiment, has continued to register below 50, except in September, indicating that the economy deteriorated continuously.

During this period, since it accepted America’s request for a Sino-American summit in San Francisco in November 2023, China has assumed a conciliatory attitude as expected, and examples included China’s cooperation in building a channel for dialogue between high-ranking officials of both governments.

As shown by the examples cited above, China generally tends to adopt a conciliatory attitude toward the U.S. when its economy is not good, though there are some exceptions in which it continues to take a hard-line stance toward the U.S. despite the deterioration of its economy as it did in 2022.

3． Correlations between China’s external policy other than the one toward the U.S. and its economic situation

In countries and territories other than the U.S., there is no such clear correlation except for China’s diplomatic stance toward the E.U.

As for E.U., basically since 2010, China has maintained favorable relations with the E.U., mainly Germany and France.

In February 2021, however, the E.U. announced comparatively minor sanctions against China over human rights problems in the Xinjiang Uygur Autonomous Region, and in response to these measures, China immediately imposed strict sanctions against the E.U.

This interrupted consultations about EU-China Comprehensive Agreement on Investment (EU-China CAI), and they are yet to be resumed.

During the period when it imposed harsh sanctions, as the entire world suffered from the spread of COVID-19, China alone enjoyed a comparatively favorable economic situation due to the success of its strict zero-COVID policy with the PMI continuing to reach above 50.

On the other hand, the E.U.’s China experts now evaluate China’s stance favorably, saying that the country has recently shifted to a more conciliatory stance than before.

While, owing to China’s closer relations with Russia after the invasion of Ukraine, the E.U. has increasingly criticized China, China has not refused dialogue with the E.U., refraining from making strong comments on the E.U.

After terminating its zero-COVID policy at the end of 2022, China saw business sentiment improve only for a short period of time, but since April 2023, the Chinese economy has continued to deteriorate to the present day.

As described above, there are correlations that indicate the conciliatory attitude China takes at a time of economic slowdown as in its diplomatic stance toward the U.S., though there are less examples that involve the E.U.

But such a clear tendency is not found in other countries.

For example, after the problem with the ownership of the Senkaku Islands occurred in the autumn of 2012, even with the deteriorating economic situation in China in 2015 and 2016, Sino-Japanese relations did not improve until the visits of Japanese and Chinese leaders to each country were resumed in 2018.

In May 2017, Mr. Toshihiro Nikai, the then Secretary-General of the Liberal Democratic Party handed a personal letter of the then Prime Minister Shinzo Abe over to President Xi Jinping of China, and this led Sino-Japanese relations to move toward improvement, and during this time, business sentiment in China was not bad.

A look at examples in the second half of 2023 and thereafter shows that with the start of the release of treated water from the Fukushima nuclear power station into the ocean, China put a ban on the import of Japanese marine products and that in addition, it maintained its cautious stance toward the relaxation of regulations on the issuance of entry visas to Japanese visitors, and as shown by these events, China has taken a stiff attitude toward Japan despite its deteriorating economy.

Since last autumn, however, the Chinese authorities have restrained their harsh criticism against treated water in Fukushima, and in addition, they have taken a slightly more conciliatory attitude in negotiations about the relaxation of regulations on visas for entry into China, an indication that the deterioration of the economy somewhat seemed to affect the Chinese government’s stance.

Other examples include the boycott campaign against South Korean products and the restriction of travel by Chinese to South Korea with the deployment by South Korea of terminal high altitude area defense (THAAD) missiles against North Korea in 2016.

In April 2020, when Australia demanded that China should make an investigation of its early response to COVID-19, China restricted the import of products such as beef and wine from Australia and travel by Australians to China, and China still imposes restrictions on imports from the Czech Republic and Lithuania, both of which support Taiwan, and as exemplified by these and other examples, China seems to be taking strict measures despite its economic situation.

The differences among these countries and territories in the actions taken by China are probably affected by factors such as the scale of the economies in the countries and territories concerned, their effects on the Chinese economy, and their political influence in the international community.

To China, only the U.S. and the E.U. are important as trading partners and investors and important players in international politics.

Japan adopts an independent diplomatic policy less often, basically cooperating with the U.S., and in addition, its economy is rapidly shrinking in scale compared to the Chinese economy. (According to the October 2023 economic forecasts of the International Monetary Fund (IMF), in the second half of 2009, China caught up with Japan in terms of nominal gross domestic product (GDP) on a U.S. dollar basis, and in 2023, its nominal GDP expanded by 4.2 times compared to Japan’s.) Therefore, China considers its economic relations with Japan as less important than those with the U.S. and the E.U.

Other countries such as South Korea, Australia, the Czech Republic, and Lithuania have even less effect on the Chinese economy, and therefore the correlations with them are weak.

It is assumed that differences in correlations with economic situations arise depending on the countries and territories concerned because China decides diplomatic policy taking these international circumstances into consideration.

Business sentiment in the Chinese economy has become worse in recent months, and for the time being, there is no hope that this will improve.

If the analyses presented above are taken into account, it is highly likely that China will continue to take a softer attitude toward the U.S. and the E.U. for some time.