What to Expect From China in 2023

2022 was a momentous year for China. President Xi Jinping won an unprecedented third term—but that was entirely as expected. The real surprise came in November, when mass protests over Beijing’s strict zero-COVID-19 policies erupted across the country, the most significant demonstrations in China since the Tiananmen Square protests of 1989. Beijing reacted first by cracking down on protests, and then by dropping most of its lockdown measures, opening up the risk of rapid COVID-19 spread.

Beyond the pandemic and protests, there is much to look out for in China next year. The world’s second biggest economy has reduced its pace of growth, raising questions about the competence of China’s leadership. Will Xi change course? And given concerns about China’s designs on Taiwan, how will Beijing’s foreign policy adapt next year?

I spoke with three top China experts on FP Live, the magazine’s forum for live journalism. Susan Shirk served as U.S. deputy assistant secretary of state in the Bureau of East Asia and Pacific Affairs from 1997 to 2000 and is the author of Overreach: How China Derailed Its Peaceful Rise; Zongyuan Zoe Liu is a fellow for international political economy at the Council on Foreign Relations; and James Palmer writes Foreign Policy’s weekly China Brief. Subscribers can watch the full 45-minute video interview in the box above. What follows is a condensed and edited transcript.

Foreign Policy: James, COVID cases are on the rise in Beijing. How bad is it?

James Palmer: It’s very bad at this point. Most people stockpiled home tests in anticipation of this moment and have been able to confirm that they have COVID. There’s this real disjunction between the official numbers—which claim that cases have been going down since the zero-COVID policy ended—and the reporting of extremely rapid spread. The caseload would be doubling every day if these numbers were anywhere near accurate.

FP: Is there data that we can trust—in terms of cases, but also in terms of deaths?

JP: No. The official numbers are not trustworthy. Beijing has consistently underreported deaths since the start of the pandemic. It has particularly underreported them this year. In the whole of China this year, during all of the outbreaks that necessitated shutting down Shanghai, and huge parts of the economy, Beijing officially noted less than ten deaths. There’s a huge gap there.

FP: Susan, I’m curious how you’ll be reading China’s COVID strategy over the next few months. What signs will you be looking out for?

Susan Shirk: I’m watching to see if it’s defensive and ideological or practical and effective, because the problem with Xi Jinping’s rule has been that it’s been the former, not the latter—and that’s a big difference from previous Chinese leaders. In this case, what we should look and see is how are they vaccinating the older population. Are they going to be willing to accept the offers of donations of Western vaccines? The U.S. government has offered very quietly; they haven’t publicized this because they want to make it possible for Xi to accept it. They don’t want to humiliate him. But many middle-class Chinese are taking trips to Macao so that they can get a Western vaccine.

Xi’s nationalism and xenophobia is harming the welfare of the Chinese people. It’s really a tragedy that compares to the Great Leap Forward and Cultural Revolution, when Mao Zedong had what Deng Xiaoping called overconcentration of authority, which led to tragedies for the Chinese people.

FP: Is it fair to say that people pin responsibility for the country’s COVID response directly on Xi Jinping? After all, he announced at the start he would manage the crisis directly.

SS: He did more than that. He had the entire standing committee of the Politburo take a pledge of loyalty to him and this policy, which he turned into a totem of his wise authority.

FP: My sense of how countries handle COVID policy in general is that there’s a fair bit of risk assessment involved, not only in terms of outcomes but also including an assessment of the risk appetite of the citizenry. What are people willing to give up and in return for what?

Zoe, is it your sense that with the protests last month, China’s leadership may have recalibrated its sense of the risk appetite of its own people? And that’s ultimately why they reversed the zero-COVID policies? What’s your read on how that happened and what may happen in 2023?

Zongyuan Zoe Liu: I cannot rule out the impact of the protests, but the change in policy is due to broader factors at play, specifically … the realization of the opportunity cost of zero-COVID policies. The projection of Chinese economic growth, or at least the target at the beginning of the year, was around 5.5 percent. Now people realize that there are indications that the Chinese economy could at most achieve somewhere between 3 to 3.3 percent … growth.

This basically means that the opportunity cost of zero-COVID policies is about 2 percent of GDP. A back-of-the-envelope calculation would show that 2 percent of the Chinese economy is $680 billion—larger than the size of the economy of Sweden or Belgium. The opportunity cost is huge, and the idea is that the loss of economic growth is being felt directly by the Chinese people. This played back through the entire policymaking loop, making the Politburo members realize the necessity and the urgency of focusing on economic recovery.

FP: Susan, we often talk of a social contract in China, where the leadership promises rapid growth in return for compliance. But does the Chinese public remain content with this tradeoff? What should we expect next year when it comes to further uprisings or questioning of Xi’s authority?

SS: I was very surprised to see protests against central government policy, because it’s something that we haven’t seen since [the Tiananmen Square protests of 1989]. We see a lot of protests, but they’re quite small and the issues are mostly local. I think Xi was quite surprised, too.

When I started thinking about 2023, projecting the future risks to the Chinese Communist Party and to Xi himself, I thought they were much more about a public split in the leadership, because most authoritarian regimes fall top down, not bottom up. The surveys that we have done at the China Data Lab of the 21st Century China Center showed that Xi’s popularity appeared to be holding up with the urban public.

Projecting into the future, given the amount of repression that’s been leveled at the protesters and the way the activists will be punished, it would really be the rare young person or migrant laborer who would now come out on the street because they did achieve their main objective of getting the zero-COVID policy changed, and it’s hard to see another issue that would be likely to bring them out on the streets. My prediction for next year is we will not see more protests.

FP: James, do you agree with that? How much of these protests are isolated to zero-COVID? How much of it was other issues that may erupt again in 2023?

JP: I think that there was a long-term frustration with the way that China has been moving backwards in terms of personal freedoms. I think Susan is probably right in that, without a clear motivating factor, it’s very hard to get people out on the streets when the risks are so high. I could see COVID itself becoming that factor if the situation got really bad: If the elderly were dying and mass hospitals were overwhelmed, you might get a volume of anger that produced big protests against the failure to prepare, especially because the government hung so much of its credibility on competent handling of the pandemic.

FP: Zoe, there’s the broader issue of China’s lagging economy, linked, of course, to everything we’ve been discussing so far. What are the key indicators for us to be looking out for in 2023?

ZZL: I would pay attention to two specific variables that might determine the outcome of the Chinese economy next year. The first, in the immediate term, would be related to China’s COVID response and crisis or risk management. The other would be China’s economic adjustment and economic stabilization policy. More specifically, I’m talking about industrial policy, because that is probably going to impact which sectors are going to get the most amount of government support, such as technology, chipmaking, manufacturing, and so on.

In terms of the sectors that are potentially able to drive a Chinese economic recovery, I would pay attention to three specific ones: infrastructure, advanced manufacturing and services, and the energy sector, specifically renewable energy.

FP: What about real estate, Zoe?

ZZL: I subscribe to the camp that is relatively pessimistic about real estate development in China. And I have two reasons: First, the pure number-wise investment in real estate is consistently going down. Even the latest statistics for November went down both in terms of investment as well as the transaction volume. And then secondly, the other reason I’m not optimistic is because China went through a long-term persistent decline of farmland during 2013 and 2019. Xi has been emphasizing food security since the beginning of the year. The primary risk factor that might have hurt China’s food self-sufficiency is really the reduction in arable land. For those two reasons, I’m not going to invest in real estate in China.

FP: Susan, I want to discuss the U.S. rollout of sanctions on China, which limited Beijing’s ability to access semiconductors up and down the supply chain. What’s your sense of where that might head in 2023? How much would it hurt China?

SS: All of these efforts to build a wall between the United States and China, after decades of very productive integration between the two systems, will continue from the U.S. side because of our own domestic politics. The Republican majority in the House is raring to go. There’s a new select committee in the House led by Republicans, which is already declaring its intention to tighten those restrictions because of the China threat. It’s hard for me to see that we’re going to be able to have an objective, dispassionate debate in Washington or even in the rest of the country about the tradeoffs of these policies, the costs and benefits to the United States and its own competitiveness.

I believe it’s a form of overreaction to China’s overreach, and it will make things more difficult for China. The big question is how other countries respond to what we’re doing. I believe that the United States would be more able to get other countries doing the same thing if these policies were more prudent. Meaning, it’s one thing to go after advanced semiconductor manufacturing, which is kind of the linchpin of the whole advanced technology economy, but it’s another if you start going after biomedical research, all of AI, and everything else in emerging technologies. That would be a clear effort to degrade China’s own development. It’s going to cause and already has caused intense anti-Americanism in China, but also it’s going to make other countries reluctant to go as far as we’re going.

FP: James, how much do these latest sanctions actually hurt?

JP: These measures are clearly already hurting Chinese companies, and we’ve seen many, many complaints from Chinese companies behind the scenes. There’s a big lobbying effort going on in [Washington, D.C.] to try and get some of these measures reversed or to find loopholes on the American side of the industry. Every conversation I’ve had with people inside the government in D.C. in the last few months has been about finding ways to hamstring the Chinese economy in development. That could be dangerous overreach, as Susan suggests.

I think that this is the course that the United States is set on, and that means you’re going to be paying 20 to 25 percent more for your television. It means the end of an era of cheap electronics and the kind of dependance upon China that the American consumer benefited from. At the same time, China is shifting from having been an 8 percent growth economy to being a 3 or 4 percent-growth economy. And that comes with a whole lot of geopolitical and political concerns as well.

FP: James, what indicators are you looking out for when it comes to the likelihood of China trying to attack Taiwan in 2023?

JP: They’re going to be so occupied with coping with the economic and pandemic crises that they’re not going to have a lot of spare energy for Taiwan. What we should be looking at is [whether] they believe that they can get the opposition party in Taiwan to do what they want.

One of the peacekeeping factors has been the belief that China could eventually secure peaceful reunification by a mixture of coercive and political means that end up in a one country, two systems type deal, but drag Taiwan back to the mainland. That’s very unlikely because the Taiwanese public emphatically does not want it, but on the other hand, the [Kuomintang party, or KMT] is probably going to get back into power at some point because that’s the nature of democracy.

The Chinese might be estimating just how much the KMT can do and how pro-Chinese they want to be, because while they’re much more pro-Chinese than the current government, they do not want to be part of One China, especially after looking at how Hong Kong was treated. I think it’s possible that Beijing will delude itself into thinking that it can have a political route to reunification, and that will help delay any kind of conflict.

FP: Susan, what are the key markers and indicators that you will be looking out for next year when it comes to the U.S.-China relationship?

SS: I’m looking for a return to some good old-fashioned diplomacy, which basically came to a halt for six years under former U.S. President Donald Trump and current U.S. President Joe Biden. And now that Biden and Xi have met in Bali, I see a little ray of hope that the leaders of the two sides have their own domestic reasons for being motivated to resume diplomatic efforts.

COVID was very disruptive because Xi Jinping was holed up in China. He didn’t travel for a long time, and now that they have met, I hope that the leaders will continue meeting, at least at the margins of other international meetings. U.S. Secretary of State Antony Blinken is going to China soon and if the two sides can signal to one another’s publics as well as their own that they have the flexibility, the willingness to make some compromises in order to stabilize the relationship, then that will help counteract the drag of domestic politics on the two sides.

FP: Zoe, I’m going to give you the last word on the U.S.-China relationship, perhaps this time with your economic expertise. What are the markers you will look out for next year?

ZZL: I would say there are reasons to be optimistic and there are reasons to be pessimistic.

Reasons to be optimistic: Financial market cooperation and integration might be making some concrete steps going forward, specifically because, for the first time in history, we are able to have full access to audit Chinese companies. This is going to, on the one hand, mitigate or even significantly reduce the risk of delisting more than 200 companies in the U.S. stock exchange. And then secondly, in terms of issue areas, climate change and food security are the two concrete areas where the United States and China can at least keep conversation going about how to be responsible, great powers and live up to the expectations of the other nations in the world.

Reasons to be pessimistic include the broader discussion of decoupling, especially with regard to technology. Looking at China’s track record, the development of China’s own indigenous science and technology was established under isolation. So if we are talking about this being a return to the Cold War era or even more stringent technological containment trying to suffocate China’s domestic, indigenous capacity, it’s not unheard of in China. However, the cost is going to be tremendously high for China.