SPY EYES

China faces tough economic, demographic and social issues it must deal with. Foreign affairs may take a back seat.
Back in February, at an Iowa state dinner held in his honor, Chinese Vice President Xi Jinping offered what the Des Moines Register described as a heartfelt toast to the Hawkeye state. Xi, who a quarter century before had visited Iowa as a local official, returned in 2012 as a national leader aiming for greater global exposure. In the presence of Iowa’s leading citizens, Xi shared his childhood memories reading Mark Twain and his long-held fascination with the Mississippi. And so he was glad that, on this most recent trip, “the unequaled beauty of Muscatine at sunset” had greeted him once again. The man who charmed the heartland of America will, at the 18th Party Congress in Beijing this coming October, officially become the President of China.
As China’s international profile continues to rise in tandem with its economic and political significance, one might conclude that the Chinese public is likely to expect Xi to carry a higher profile on the international stage. As the leader of a world power, Xi will have to devote more time to international affairs, take the lead in debates on global issues, interact more frequently with foreign audiences like the citizens of Iowa, and articulate China’s role as a shaper of world affairs. In reality, however, Xi may be preoccupied with addressing a host of economic and social challenges that China is likely to encounter in the decade ahead.
As China’s next leader, one of Xi’s main concerns will be managing the significant economic challenges that are beginning to surface.  In particular, Xi will have to shepherd his country through the most turbulent part of its gradual transition from an export-oriented economy to one that is based more on domestic consumption. For the past 30 years, low-wages and an abundance of able-bodied young workers has given Chinese manufacturing a huge comparative advantage and enabled its expansion.
In recent years, however, China’s economic model had become increasingly problematic. As consumers in Europe, Japan, and the United States, saddled with economic challenges at home, reduced their consumption, an export-centered economy has proven to be unsustainable, with unsold goods—everything from toys to automobiles—reportedly piling up on factory floors and showrooms across the country. Chinese wages, once the country’s greatest assets in attracting manufacturing, have been rising for years, leading some, like Boston Consulting Group, to predict that there will be a “manufacturing renaissance” in the United States. Meanwhile, should conditions continue to deteriorate and unemployment rise throughout China, the government will be particularly worried about social unrest, as was the case during the early stages of the global financial crisis that began in 2008.
Over the medium-term, China’s economic challenges will be driven more by its bleak demographic trends. As the Economist reported, the Chinese government’s most recent data revealed that population growth averaged 0.57 percent annually during the first decade of the 21st century, down from the 1.07 percent annual growth rate China maintained during the 1990′s. Consequently, China’s population is aging. One could attribute China’s demographic challenges to Beijing’s one-child policy, or the fact that as a country modernizes and becomes wealthier its people tend to live longer and have less children. Whatever the cause, as China grows old before it gets rich the government will need to find a way to pay for a better social safety net and the other increased needs a graying population creates for a government.
As Xi, along with China’s new group of leaders, work through these challenges and gradually reform the country’s economic system to better accommodate the social, economic, political, and demographic developments at home and abroad, they’ll also have to contend with a citizenry that is becoming more assertive in demanding and protecting their rights and interests after 30 years of rapid, harsh, and often unequal processes of growth. They may not be calling for regime change, but they are certainly demanding that their current government be more responsive to their needs.
In short, the China that Xi and the incoming leadership inherit is one in the midst of a delicate transition. The export-led system that China’s leaders had relied on for the past several decades benefited their country tremendously. In the process, however, the model also strained Chinese society in significant ways, for which the consequences are now only beginning to emerge. The build-up of internal pressure, coupled with the inability of developed economies to sustain China’s export-oriented economy, means that efforts to rebalance—internally and, in the process, externally—must take place.
The conversation on the significance of tackling these internal challenges is already taking place publicly in China. Professor Cui Liru, who directs the government-affiliated China Institutes for Contemporary International Relations, admitted in a recent essay that the coming task for Beijing is substantial, and will require the “strenuous efforts” (jianku nuli) of both the government and the people. The Chinese government’s shift to establish a social safety net and improve the people’s well-being, Cui argues, will be the concrete examples demonstrating that the promises of “social fairness, justice, prosperity, and harmony” are being kept. They also form, Cui goes on to say, the legal foundation for which the Chinese Communist Party’s long-term rule is based.
As I have argued in the past, it is imperative that U.S. policymakers realistically assess China’s internal challenges if they hope to understand Beijing’s intentions and insecurity, its policies’ impact on the globalized economy, its relations with Washington, and, ultimately, what type of power it will be within the existing international system. For what matters most is not so much Xi’s ability to present himself and his country abroad—which is, nevertheless, no doubt, important—but how successful he will be in guiding China through a decade of painful but necessary transitions. In this, perhaps all countries are not so different after all: that, as a legendary American politician once said, “all politics are local.”
Anka Lee is an Asia Security Analyst at the CNA Corporation. His work has been published in TIME and NBC News.
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