They just need to rebuild optimism by incentivizing investment domestically---key to prevent war.

Gauging by media coverage, one would be certain that China’s economy is on the edge of a crisis. Reports seem to be universally negative, so much so that my skeptic’s radar is blinking bright red telling me to not accept conventional wisdom so quickly.

Among analysts, most agree with the Council on Foreign Relation’s Zongyuan Zoe Liu and the Rhodium Group’s Logan Wright, also with CSIS, that long-term structural issues, such as debt and demography, are finally biting. The Peterson Institute’s Adam Posen emphasizes Xi’s pro-state interventionism and the negative reaction it is engendering as the main sources of weakness. One contrarian is Posen’s colleague Nicholas Lardy, whose careful reading of the data suggests it is premature to declare a permanent slowdown and shows there are already some signs of a modest rebound.

Although direct observation can yield unrepresentative anecdotes and hence be biased, in an era of limited travel and field research, some sense of what things feel and look like on the ground can be particularly useful. In my case, that involves three trips to China in the past year (September–October 2022, March 2023, and July 2023). In all three, the overwhelming sense I came away with on the economy is a massive crisis of confidence among private businesses and consumers. The lone bright spot—the booming electric vehicle sector—was so discordant that it actually sat clearly in juxtaposition to the dominant foul mood.

Company executives, investors, and consumers I privately spoke with in Beijing, Shanghai, and Hangzhou raised three common concerns. The first is the mishandling of the Covid-19 pandemic, particularly from March 2022, when Shanghai began its lockdown. Lockdowns elsewhere were more partial but still highly disruptive and stressful. The sudden abandonment of zero Covid with no preparation only reinforced these worries. The second is the withering attack on the private sector, particularly internet-based companies, and the emphasis on “common prosperity,” which leads businesspeople to fear that their success cannot be long-lived. The third is the growing rivalry with the United States and other advanced economies. These tensions raise the possibility of war; increase doubts about future access to technology, markets, and capital; and reduce the feasibility of regular travel and engagement with the West.

So many people I spoke with were deeply uncertain about their country’s future and their own prospects. These anxieties appear to have translated into increased savings and less investment and consumption. My sense is that although the real estate sector’s malaise is squeezing pocketbooks, the broader drop in confidence is less tied to the popping of the property bubble and more to do with a sense that the country is broadly going in the wrong direction.

If this is the case, then although authorities need to tackle debt and demography, the real challenge is to re-instill a sense of a common positive purpose about China which the public accepts, reduce tensions with the West, and demonstrate basic competence in governance. Such changes will not necessarily result in an economic boom, but they would rebuild a sense of optimism that would generate greater popular acceptance—and possibly happiness—with whatever economic outcome would emerge.